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Jeff Rybak (14)

Legal Environment - Lecture 002

6 Pages

Management (MGS)
Course Code
Jeff Rybak

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PARTNERSHIPSAND SOLE PROPRIETORSHIPS 14 January 2014 (Chapter 21, p.534-546) Every business involves risks. Who bears the risk depends upon the type of organization that is carrying on the business: • Sole proprietorship • General partnership • Limited partnership • Corporation The law determines the extent to which individual entrepreneurs benefit when their businesses prosper and the extent to which they are responsible for losses when they do not. It also provides a structure for the operation of businesses, focusing on the relationship that owners and managers have with the business and with each other. It establishes the rights and obligations of owners to manage the business themselves and to monitor and control others who manage on their behalf. Business organizations law addresses the risks that business owners face as a result of actions by managers. The stakeholders in business organizations: • Government • Financial creditors • Trade creditors • Managers • Owners • Customers • Employees • Public • Commercial Activity SOLE PROPRIETORSHIPS Simplest way to form a business. SOLE P ROPRIETORSHIP exists when a person carries on business on their own, without adopting any other form of business organization (IE: Agreeing to cut your neighbor’s grass for money each week or to employ someone else, but remaining the sole owner and only person responsible for obligations). For relatively small businesses. The sole proprietor gets all the benefits and bears all the burdens of the business: • Exclusively responsible for performing all contracts entered into the course of the business (IE: Contracts with customers, suppliers, employees, lenders) • Exclusively responsible for all torts committed personally in connection with the business (also liable for all torts committed by employees in the course of their employment) • For income tax purposes, income or loss from sole proprietorship is included with income or loss from other sources in calculating the sole proprietor’s personal tax liability Advantage • Simple and easy to set up • Easy to dissolve Disadvantage • Unlimited personal liability (third parties may take all the sole proprietor’s personal assets to satisfy the businesses’ obligations) • Raising money (only way is to borrow money directly, whereas other forms have wider range of financing possibilities) LEGAL REQUIREMENTS FOR S OLE P ROPRIETORSHIPS Rules for carrying on a sole proprietorship: • Name of a sole proprietorship must be registered if that name is something other than, or more than, the proprietor’s personal name (IE: Amman Malik would not have to register if he carried on a grass cutting business under his own name, but he would have to register if he used the name “Malik’s Gardening Services”). Registration must be completed in every province or territory in which the sole proprietorship carries on business. Protects federal trademark laws • Business license is required.USINESS LICENSE is a government permission to operate a certain kind of business (IE: Taxi-driving, restaurants, real estate agents, car dealers, securities brokers, labor and environmental standards) GENERAL PARTNERSHIPS Where people pool their resources, knowledge, or skills. ENERAL P ARTNERSHIP is a form of business organization that comes into existence when two or more persons carry on a business together with a view to a profit. Partnership arises automatically by operation of law when a relationship meeting these criteria begins: • No formalities are required, although the partnership may have to register its name and obtain a business license (IE: James agrees to buy lawnmower and look for homeowners, you agree to cut lawns, profit split between the two, you and James have created a partnership. Even if you and James never made any money, you would still have formed a partnership as long as your goal was to make money) Partners carry on business on their own behalf, partnership not legally separate from partners: • 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 the business (incl. torts committed by a partner or an employee of partnership) Partnerships have unlimited personal liability. All of the partner’s persona assets, not just those that the partner committed to the business, may be seized to satisfy a partnership debt. To determine the liability of partners for income tax, the income (or loss) of the partnership is calculated by adding up all revenues of partnership business and deducting all expenses. A share of the income (or loss) is allocated to each partner according to the partner’s entitlement to share in the profits of the business. PARTNERSHIP A GREEMENT is a contract between partners regarding the operation of the partnership. C REATING A PARTNERSHIP Factors suggesting the existence of a partnership: • If you are compensated only out of revenues, you have a stake only in how much the business can sell. If you are sharing profits, you must be concerned with the entire business operation (incl. management of expense), with this financial stake, a court is likely to find that the business is being carried on for your benefit and that you are a partner in the business o Partnership may not necessarily exist because parties share profit. People may share profits without carrying on business together:  Loan is to be repaid out of the profits of the borrower’s business  An employee’s compensation varies with the employer’s profits (IE: Profit sharing arrangement)  Purchaser of a business agrees to pay some of the business’s profits to the seller as part of the purchase price • Since profit sharing is not conclusive, other factors must be considered to determine whether a partnership exists. Carrying on a business together suggests existence of an enduring relationship o Exception: Pair of software companies split cost of particular research project even though it is a single, time limited activity (Spire Freezers Ltd v The Queen) • Partnership is less likely to exist if people involved are merely passive investors (IE: Own an apartment building to collect rent) • Jointly owning property • Participating in management (incl. Having signing authority for contracts and bank accounts, and enjoying access to information regarding the business) • A person who describes themselves as a partner or allows someone else to do so is likely to be a partner. • A person who permits their name to be used as part of the firm name will also likely be found to be a partner **NOTE: Family name business R ISK AND LIABILITY INGENERAL P ARTNERSHIPS Each partner is an agent of the partnership when acting in the course of the partnership business. An exception exists if a partner did not have authority to act in a particular way (because of restriction in partnership agreement
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