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Text reading notes for Partnerships, Sole Proprietorships and Trusts (Ch 16 in 9th edition / Ch 17 om 8th edition)


Department
Management (MGS)
Course Code
MGSC30H3
Professor
Professor Rybak

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CH 17 LAW OF SOLE PROPRIETORSHIP AND PARTNERSHIP
Sole Proprietorship
-Simplest form of business org as far as the law is concerned
-The sole proprietor, as the owner of the business, owns all of the assets, is entitled to all of the profits, and is responsible
for all of the debts
-Makes all of the decisions in the operation of the business and is directly responsible for its success or failure
-Major disadvantage: limited ability to raise capital and management-skill limitations
-Require registration or licensing of the business
Provincial – legislation governing professions (medicine, dentistry, law, architecture, etc), semi-professional
and skilled trade activities
Municipal – skilled trades, the operation of taxis, and many other service-oriented business
-Advantage: freedom in the operation makes it the most attractive form of business org for a new, small enterprise
Partnership
-Also a simple form of business org
-Provides additional mgmt expertise in the operation and additional capital
-Lending institutions are generally more willing to extend credit in larger amounts to a partnership than a sole
proprietorship
-Partners usually possess a greater interest in the success of the business than do employees
-Overall advantage: intro of new proprietors may substantially increase the chances for growth and development of the
enterprise
-Risk: each partner individually, is responsible for the carelessness or poor judgement of each other partner in his or her
conduct of partnership business
Historical Develoment of Partnership
-A partnership is a relationship that subsists b/t two or more persons carrying on business in common with a view to
profit
Excludes all associations & org that are not carried on for profit (ex. Social clubs, charitable org, and
amateur sports groups)
Ex. The simple debtor-creditor relationship, ordinary joint ownership of property, profit-sharing schemes,
the loan of money, & the sharing of gross receipts from a venture do not fall within the definition of a
partnership
-Two essential characteristics: informal + mutual trust and confidence
-The Societe en Commandite was developed in Continental Europe after the discovery of distant markets and the New
World in the 15th and 16th centuries. This form of org allowed the contribution of capital by investors of the profits from
the venture, although no right to actively participate in the mgmt of the org. As a result, the investors were given limited
liability for the debts of the org
-The concept in a modified version found favour in England in the 16th century in the form of the joint stock company – a
partnership in which the investors, as partners, delegated the authority to manage the org to a board of mgmt. However,
unlike the Societe end Commandite, unlimited liability of the individual partners remained.
-In 1879, Sir Frederick Pollock was asked to prepare a draft bill for the English Parliament that would codify the law of
partnership (but did not come before Parliament until 10 years later).
Retained rules of equity and common law relating to partnerships, except where the rules were inconsistent
with the express provision of the Act
-the Partnership Act was passed in England, then adopted with minor modifications in Canada and may other countries
that were part of the British Commonwealth
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-Partnership legislation permits the formation of partnerships for all commercial enterprises, except for a number of
activities such as banking and insurance, where the corporate form (and special legislation) is necessary
-By definition, partnership must consist of at least two persons
-Limited Liability Partnership (LLP) is a special case – a hybrid of a corporation and partnership
Nature of a Partnership
-The sharing of the net profits of a business is prima facie evidence of the existence of a partnership
-In contrast, the remuneration of a servant or agent by a share of the profits of the business would normally not give rise
to a partnership, nor would the receipt of a share of profits by the widow, widower, or child of a deceased partner
-If the parties have each contributed capital and have actively participated in the management of the business, then these
actions would be indicative of the existence of a partnership.
-Co-ownership of land – a relationship that closely resembles a partnership but that is treated as a diff manner at law
PartnershipCo-ownership
Contractual relationshipMay arise in several ways (ex. Through
succession, inheritance of property from a
deceased co-owner)
Founded on mutual trust; a personal relationship thats not freely alienable May be freely alienable without the consent
of the other co-owner (sell ones interest
without other co-owner’s consent)
An agent of all other partners in the conduct of partnership business Normally not an agent of other co-owners
Share in partnership property is never real property; it is always personalty, as
it is a share in the assets, which can only be determined (unless there is an
agreement to the contrary) by the liquidation of all partnership property
May be of either personalty or realty
Subject to the Partnerships Act in its operation, & dissolution is by the ActMay be dissolved under legislation that
provides for the division or disposition of
property held jointly
-A partnership may, in a sense, be established from the point of view of, and for purposes of, 3rd parties by estoppels. If a
person holds himself or herself out as being a partner, either by words or conduct, or permits himself or herself to be held
out as a partner of the firm, that person may be liable as a partner if the 3rd party, on the strength of the representation,
advances credit to the firm. This would apply even if the representation or holding out is not made directly to the person
advancing the credit.
-A minor may become a partner, but if he or she should do so, the ordinary rules of contract apply. The contract is
voidable at the minors option. Since it is deemed to be a continuing relationship, the minor must repudiate the
agreement either before or shortly after attaining the age of majority. If repudiation takes place before the minor
reaches the age of majority, then the minor will not normally be liable for the debts of the partnership unless he or she
committed a fraud. Once repudiation takes place, the minor is not responsible for the liabilities of the partnership.
However, the minor is not entitled to a share in the profits until the liabilities have been paid.
Liability of a Partnership for the Acts of a Partner
-The persons who form a partnership are collectively called the firm, and the business is carried on in the firm name
-Every partner is the agent of the firm in the ordinary course of partnership business
-Partners create joint and several liability – one partners actions or statements create liability for that partner, and for
each of the other partners
-The act that the partner performs must be related to the ordinary course of partnership business before his or her act
binds the other partners. If the act is not something that falls within the ordinary scope of partnership business, then only
that partner would be liable
-A firm may also be liable for a tort committed by a partner, if the tort is committed in the ordinary course of partnership
business
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