Textbook Notes (368,432)
Canada (161,877)
LAW 603 (76)
Chapter 21

Chapter 21.docx

8 Pages
108 Views
Unlock Document

Department
Law and Business
Course
LAW 603
Professor
George Ellinidis
Semester
Fall

Description
Sept. 11 2012 Chapter 21: Basic Forms of Business Organizations Introduction  Business organizations law determines the extent to which individual entrepreneurs benefit and to what extent they are responsible for the losses o Also addresses risk that other stakeholder groups experience un their relationships with the business (only to a limited extent) o Ex: for creditors of a business organization the law governs when a business is bound by the contract that creates the obligation to the creditor o Provides structure for the operation of the business, focusing on relationships o Establishes rights and obligations by owners to manage business and monitor and control those who manage on their behalf o Addresses the risks that business owners face as a result of actions by managers Sole Proprietorships  Sole Proprietorships – exists when a person carries on business on their own, without adopting any other form of business organization o If you enter into a contract to employ someone, you are still the only person responsible for the business’s obligations o There is no separation between the sole proprietorship business organization and the individual who is the sole proprietor o You cannot be an employee of the business because you cannot contract with yourself  The SP is exclusively responsible for performing all contracts  The SP is exclusively responsible for all torts committed personally in connection with the business and vicariously liable for all torts committed by employees  The income or loss from the SP is included with the income or loss from other sources in calculating the sole proprietor’s personal tax liability  Main advantage: easy to set-up and dissolve  In order to dissolve, simply stop carrying on the business o However, this does not excuse you from any obligations made during business  Main disadvantage: unlimited personal liability o Unlimited Personal Liability – third parties may take all of the sole proprietor’s personal assets to satisfy the business’s obligations  Many try to manage liability risk through contracts and insurance, but usually incorporation is a less expensive and more effective strategy o Limited financing options - raising funds is also difficult since money must be borrowed directly by the SP Legal Requirements for Sole Proprietorships  Name must be registered if it is something other than the proprietor’s personal name o Must be done in every province where the company conducts business o Does not create any ownership interest in the business name  Business license is necessary for some types of activities  Business License – government permission to operate a certain kind of business o Ex: taxi drivers, restaurants, real estate, car dealerships, securities brokers etc. [Type text] General Partnerships  General Partnership – a form of business organization that comes into existence when two or more persons carry on business together with a view to a profit o Arises automatically by operation of law, when a relationship meeting these criteria begins o No formalities are required, but may have to register name and obtain a license Characteristics of General Partnerships  Partnerships not legally separate from the partners o A partner cannot be employed by the partnership o All benefits of the partnership accrue directly to the partners o All partners are personally liable for all of the obligations of the business, even if they did not personally consent to them  Including torts committed by a partner or employee  Liable to the full extent of the obligation – all of a partner’s personal assets may be seized to satisfy a partnership debt (unlimited personal liability) o Creditworthiness of partnership is based on creditworthiness of partners  Share of income (or loss) is allocated to each partner according to the partner’s entitlement to share in the profits of the business o Must be included in personal income, even if profits were re-invested in business Partnership Legislation and Partnership Agreements  Based on English Partnership Act of 1890 in all provinces except Quebec o Does not provide a satisfactory set of rules  Many use a Partnership Agreement – a contract between partners regarding the operation of the partnership o Legal issues usually resolved on the basis of the legislation and partnership agreement Creating a Partnership  When two or more persons carry on business together with a view to a profit  Hard to tell when if a partnership relation exists; many factors: o Most important: sharing of profits  When you have a financial stake in the management of the business though sharing profits, a court is likely to find that the business carried on for your benefit and that you are a partner in the business  Can share profits without carrying on business  Loan is to be repaid out of profits  Employee’s remuneration varies with employer’s profits (profit-sharing arrangement)  Purchaser of a business agrees to pay some of business’s profits to seller o Carrying on business together suggests the existence of an enduring relationship  May arise even in relation to a single, time-limited activity o Less likely if people involved were merely passive investors  Ex: jointly own an apartment building and collect rent o A person who describes themselves as a partner or allows someone else to do so  Permits their name to be used as part of the firm name o Sharing responsibility for losses, including guaranteeing partnership debt o Jointly owning property o Participating in management, including having signing authority for contracts and bank accounts, and enjoying access to information regarding the business [Type text] Risk and Liability in General Partnerships  Provincial partnership statutes determine when a partnership incurs liabilities  Each partner is an agent of the partnership when acting in the usual course of the partnership business o An exception exists if a partner did not have the authority to act in a particular way and the other party knew that the partner lacked authority  Places risk of unauthorized behaviour by one partner on all partners o Partners also liable for torts (including negligence) Managing the Risk that a Business Relationship Will Be Found to Be a Partnership  Partners have unlimited personal liability for the obligations of the firm, including liability for unauthorized acts and torts of the partners that bind the firm o Entrepreneurs risk it because they share in profits and write off losses o Lenders will want to avoid these risks  Insist that the contract governing the relationship states that the relationship is not a partnership  Not enough - Courts will consider how parties actually acted  Negotiate to restructure the business organization so it’s not a partnership  Insist upon sufficient compensation to reflect any residual risk that you will be found to be a partner  Do not enter the relationship without consulting with a lawyer Managing Liability Risk if You Are a Partner a) Each partner owes a fiduciary duty to the others o Fiduciary Duty – requires a partner to act honestly and in good faith with a view to the best interests of the partnership o Partners must never put their personal interests ahead of the partnership’s o A partner is prohibited from competing with the partnership or using the name, property or business reputation to obtain a personal benefit o A partner who breaches fiduciary duty must pay any resulting profits to the partnership b) Partnership agreement can be used to manage the risk of liability o Authority of partners can be limited and subject to control and monitoring o Note: when a partner fails to follow the rules and creates a liability to a third party, the firm may still be liable o Right of Indemnification – when a liability is created by a partner in breach of the partnership agreement requirements, the agreement may require the offending partner to compensate the others for any amount that they must oat to a third party  Minimize risk by holding the partnership interest in a corporation, limiting liability through contract or insurance c) Practical steps o Natural relationship of trust and confidence – small number of people who know each other very well o Informal monitoring through daily interaction  Protection breaks down as business expands o Limited Liability Partnerships – individual partners are not personally liable for the professional negligence of their partners and some other obligations if certain requirements are met  Accountants and lawyers  Partnership remains liable for all obligations [Type text] Managing Liability Risk When You Are Not a Partner  Not liable for liabilities that occurred before you joined or after you left o May be liable if you hold yourself out or allow someone else to do so o Holding Out – when you represent yourself as a partner or allow someone else to do so o Ex: bank can seek repayment from you if it relied on your apparent membership in the firm when deciding to make the loan o Allowing your name to appear on letterheads, invoices or business signs makes you liable  However, cannot be held liable if you carelessly failed to realize that your name was associated with the firm  Issues of holding out usually arise after a partner leaves a firm. Concerned about: o Clients who dealt with the firm prior to your departure – you will continue to be liable to them until they learn of your departure  Give them actual notice of departure  Ensure your name is removed from partnership registration filed with provincial government  Notice published in local newspaper (if notice to each client is impractical) o Clients who deal with the firm for the first time after your departure or who never knew you were a member of the firm – cannot hold you liable unless you were held out to be a partner at the time of business  Publishing your departure in the Ontario Gazette is enough to avoid liability  You should allow the firm to continue using your name only if the partnership agrees to indemnify you for any liabilities as a result Internal Organization of the Partnership  Default Rules – kind of standard form agreement in partnership statutes for the internal organization of a partnership that apply unless the partners agree to some other agreement o What each partner will do for the business, what their entitlement to profits will be etc. o Default rules give partners great flexibility to c
More Less

Related notes for LAW 603

Log In


OR

Join OneClass

Access over 10 million pages of study
documents for 1.3 million courses.

Sign up

Join to view


OR

By registering, I agree to the Terms and Privacy Policies
Already have an account?
Just a few more details

So we can recommend you notes for your school.

Reset Password

Please enter below the email address you registered with and we will send you a link to reset your password.

Add your courses

Get notes from the top students in your class.


Submit