Textbook Notes (368,326)
Canada (161,799)
LAW 603 (76)
Gil Lan (22)
Chapter 21

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Law and Business
LAW 603
Gil Lan

Chapter 21 – Basic Forms of Business Organizations Who bears risks? Depends on type of organization carrying on business; • Sole proprietorship • General partnership • Limited partnership • Corporation Law governing business organizations also provides structure for the operation of businesses, focusing on relationship that owners and managers have with the business and with each other. Business organizations law addresses risks that business owners face as a result of actions by managers. SOLE PROPRIETORSHIP Exists when a person carries on business on their own, without adopting any other form of business organization. • Simplest form of business organization • Benefits: easy to start i.e. cutting neighbour’s lawn • Can employ another but you remain the sole owner of the business and only person responsible for its obligations • No separation between sole proprietorship business and individual who is SP • SP cannot be an employee of the business because you cannot contract with yourself Implications between sole proprietorship and stakeholders; • SP exclusively responsible for performing all contracts entered into during course of business, including contracts with customers, suppliers, employees and lenders • SP exclusively responsible for all torts committed personally in connection with businesses; also vicariously liable for all torts committed by employees in course of employment • Income tax purposes; income or loss from SPship is included with income or loss from other sources in calculating the SP’s personal tax liability Advantages: • Easy to set up, easy to dissolve • SP simply carries on business, Disadvantages: • Liable for all obligations that arise in connection with business while you were carrying it on • Unlimited personal liability; third parties may take all the SP’s personal assets, not just those within the business, to satisfy business’s obligations. • Personal Liability increases as business and related liabilities increase • Personally responsible for all employees • Risk management; incorporation, insurance, contracts • Only financing is to personally borrow money Legal Requirements for Sole Proprietorship • Name must be registered if name is different from SP’s personal name • Registration in every province business carries on • Business license is necessary for certain activities; business license is government permission to operate a certain kind of business GENERAL PARTNERSHIP Is a form of business organization that comes into existence when two or more persons carry on business together with a view to a profit. • Arises automatically by operation of law when a relationship meeting these criteria begins • NO FORMALITIES required; although the partnership may have to register its name to obtain business license • STILLA PARTNERSHIP; even if you do not make any money Characteristics of General Partnership • Partners carry on business on their own behalf • Partnership not legally separate from the partners • Consequences of this: - Partner cannot be employed by partnership - All benefits of partnership business accrue directly to partners - All partners, even those who did not consent to a particular obligation, are personally liable for all obligations of business, including torts committed by a partner or an employee of the partnership in the course of the firm’s business • UNLIMITED PERSONAL LIABILITY • PARTNERSHIP IS LIABLE FOR AN OBLIGATION, EACH PARTNER IS LIABLE TO FULL EXTENT OF OBLIGATION. • ALL OF PARTNER’S PERSONAL ASSETS MAY BE SEIZED TO SATISFY PARTNERSHIP DEBT – NOT JUST THOSE THEY COMMITTED TO THE BUSINESS. • CREDITWORTHINESS BASED ON THAT OF INDIVIDUAL PARTNERS. • INCOME TAXES; ADDING ALL INCOME (OR LOSSES) AND SUBTRACTING ALL EXPENSES – SHARE OF INCOME (OR LOSS) ALLOCATED TO EACH PARTNER BASED ON PARTNER’S ENTITLEMENT TO SHARE IN PROFITS OF BUSINESS. • SHARE MUST BE INCLUDED IN PERSONAL INCOME, EVEN IF REINVESTED IN BUSINESS. Partnership Legislation and Partnership Agreements A contract between partners regarding the operation of the partnership. • Used to supplement English Partnerships Act of 1890 • Legal issues in Pships resolved on basis of agreement and this legislation Creating a Partnership • When 2+ persons carry on business together with view to a profit • Factors must be considered; - MOST IMPORTANT; sharing of profits – focuses on requirement that partners must carry on business together – in sharing profits; you are concerned with entire business operations – this means it is carrying on for your benefit - PEOPLE MAY SHARE PROFIT WITHOUT CARRYING ON BUSINESS TOGETHER; i. Loan is to be repaid out of profits of borrower’s business ii. Employee’s remuneration varies with employer’s profits, i.e profit- sharing arrangement iii. Purchaser of a business agrees to pay some of business’s profits to seller as part of purchase price • Other factors: - Suggests an enduring relationship; probably no Pship if conducted a single transaction - Pship may not exist if people are merely passive investors; ex. Two people own an apartment building and collect rent. ***Difference; if active participation in management and sharing profits – suggests business - Person describes themselves as a partner and allows another to do so as well. - Person who allows their name to be used as part of firm name RISK AND LIABILITY IN GENERAL PARTNERSHIPS How Partnership Liabilities Arise • BASIC RULE: each partner is an agent of the partnership when acting in the usual course of the partnership business. • A partner may incur expenses that will bind the partnership; unless it is stated in partnership agreement that a partner does not have certain authority to act in a certain way. • Rule places risk of unauthorized behaviour by one partner on all the partners. • Partners are liable for tort (i.e. negligence) that their fellow partners commit in ordinary course of partnership business. Managing Risk that a Business Relationship will be found to be a Partnership • Closely examine relationship to see if you are entering a partnership • Insist that contract governing relationship state that relationship if not a partnership • Negotiate to restructure the business organization so that it is not a partnership • Insist upon sufficient compensation to reflect any residual risk that you may be found to be a partner • DO NOT enter the relationship without seeking lawyer’s advice Managing Liability Risk if you are a Partner • EACH PARTNER OWES FIDUCIARY DUTY – Comply to reduce risk; - Fiduciary Duty requires a partner to act honestly and in good faith with a view to the best interest of the partnership - Partners must not put personal interests ahead of those of partnership - A partner is prohibited from competing with partnership - Partner cannot use partnership name, property, or reputation to obtain personal benefit - BREACH OF FIDUCIARY DUTY; partner must pay profits to partnership • PARTNERSHIP AGREEMENT CAN BE USED TO MANAGE RISK OF LIABILITY - Partner’s authority can be limited and subject to control of monitoring (i.e. who can write cheques, sign contracts) - Breach of partnership agreement may require offending partner to compensate others of any amount that they must pay to a 3 party – other partners have RIGHT TO INDEMNIFICATION • PRACTICAL STEPS TO REDUCE RISK OF PARTNERSHIP LIABILITY - Partner among small number of people who know each other well; natural partnership of trust and confidence reduces risk of unwanted liability - Daily activity provides opportunity to informally monitor one another; little risk of unauthorized activity - Formal monitoring mechanisms must be established as partnership becomes more elaborate • PROFESSIONALS CAN FORM LIMITED LIABILITY PARTNERSHIPS - Limited Liability Partnerships (LLP) individual partners are not personally liable for the professional negligence of their partners - Partnerships assets can be exhausted, but no personal claims can go against the individual partners – other than the one responsible for the negligence. - Same as general partnership in all other respects MANAGING RISK WHEN YOU ARE NOT A PARTNER • Not liable for liabilities which arose before you joined, or after you left partnership • May be liable for partnership obligation is you hold yourself out as a partner or allow someone else to do so even if you were never a partner and someone relied on this info when they dealt with the partnership (ex. Loan from a bank to partnership based on your creditworthiness) • 3rd party can seek repayment from YOU because they relied on your apparent membership in firm • ALSO AT RISK: if your name is on the partnership letterhead, invoices, or sign • CANNOT BE HELD LIABLE unless you actually hold yourself out as a partner or actually know that your name was being associated with partnership and do nothing about it. • If you leave a firm, you should be considered for debts that arise after you leave, should consider two groups of clients; - Clients who dealt with firm PRIOR to your departure – they may continue to rely on your creditworthiness when dealing with firm. YOU WILL CONTINUE TO BE LIABLE TO THEM FOR PARTNERSHIP OBLIGATIONS UNTIL THEY LEARN OF YOUR DEPARTURE - Clients who deal with firm FOR THE FIRST TIME after your departure or who never knew that you were a member of the firm – They cannot hold you liable
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