Management and Organizational Studies 2275A/B Chapter Notes - Chapter 14: Franchising, Accounts Payable, Fiduciary

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Business Law
Ch. 14 Textbook
Business Forms and Arrangements
Forms of Business Organization
The Sole Proprietorship
o The sole proprietorship is the oldest form of business organization and the one
most often used by small businesses.
o Sole Proprietorship
An unincorporated business organization that has only one owner
o A discussion of the legal consequences of this form of business is a discussion of
the rights and liabilities of an individual
o Financial Liability
The Bank Loan: If Luke decides to borrow money from the bank, it is Luke
who promises to repay the loan, not his business
Luke is the business; Luke is the debtor and is responsible for the debt
The Breach of Contract: If at some point the business supplies a defective
system to a customer, Luke is in breach of contract
A sole proprietor has what is known in law as unlimited liability
Unrestricted legal responsibility for obligations
o Profit Sharing
The sole proprietorship not only bears the risk of failure, but also enjoys
this advantage: all the profits after taxes accrue to the sole proprietor
o Decision Making
Having no partners and no board of directors to report to, can make
business decisions very quickly and independently
Should the owner die, the business is terminated
o Sources of Capital
A ajo diffiulty ith goig it aloe: is that the sole popieto has
minted access to capital
o Taxation
Pofits ad losses ae siply epoted o the oe’s pesoal ioe
tax return
o Transferability
A sole proprietorship cannot be transferred or sold to another because it
has no legal status
o Regulations
There is no general need to incur legal fees to create the business vehicle.
Doing business through the sole proprietorship is simple and inexpensive
Requirement is the registration or licensing of the business.
Requirements vary from province to province but, generally, persons who
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offer specialized services to the public must be licensed to practice their
particular skill
The fees associated with licensing and registration are generally not
A sole proprietor who wishes to use a name other than her own for
conducting the business must register the name at the local registry
office or other government office designated by the province, where such
records are kept and made available to the public
A sole proprietor (unlike a public corporation) is not required to publish
the usiess’s fiaial stateets
The Partnership
o When two or more persons want to pool their resources and carry on business
together, one of the most common options is to form a partnership. A
partnership is much like a sole proprietorship in that neither has a legal
personality- or legal existence- separate from the people who comprise them
o Legal relationship that automatically arises when two or more people do
business together with the objective of making a profit
o The rules governing partnerships come from three sources: partnership
legislation (on place in every province), contact law, and agency law
o Financial Liability
Each has unlimited liability for partnership debts and other obligations
Each partner is fully responsible for all the debts and obligations of the
partnership and not just for some appropriate proportion
Joint Liability
Liability shared by two or more parties where each is personally
liable for the full amount of the obligation
Each one of the partners has full and complete exposure on each and
every obligation incurred
The key poit fo liaility pespetie is that eah pate’s pesoal
assets can be seized and sold through the judicial process if the
partnership assets are insufficient to satisfy partnership obligations
o Profit Sharing
It is the partners themselves who decide how profits and other firm
assets are to be divided. If they fail to agree on this point, partnership
legislation requires them to share profits equally
Relationship among the partners themselves- including profit sharing- is
something they are free to define in any way they see fit
o Decision Making
Because a partnership comprises two or more persons pooling their
resources, the management base is potentially strong
There is also the danger of divided authority, where may impede decision
making. Instances are bound to arise in which responsibility overlaps. This
too can result in conflict and delayed decision making
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o Sources of Capital
It provides more sources of capital than a sole proprietorship
o Taxation
The partnership is not a spate legal entity, and therefore any income
from the partnership business is allocated to the partners
o Transferability
The partnership does not provide for the ready transfer of interest from
one owner to another
Each partner has an interest in all partnership property
o Agency and the Partnership Act
Partnership law is based in large part on contract law, agency law, and
provincial partnership legislation, known in every jurisdiction as the
Partnership Act
o When a Partnership Exists
The definition excludes charitable and not-for-profit endeavors. It does
not, however, exclude unprofitable ventures that otherwise meet the
definition of partnership so long as an intention to make a profit is
A person who conducts himself as if he were a partner- by sharing in
profits, managing the business, or contributing capital to establish a
business- is a partner in the eyes of the law
I lassifyig Roge’s status, hat attes I hat Roge atually does i
relation to the business, not what a document says
o The Relationship of Partners to One Another
The Pateship At poides that they also eoe oe aothe’s agets
as ell as the agets of the fi i attes elatig to the pateship’s
The law does not allow a partner to make personal profit from the
partnership property, to compete against the partnership, or to use a
partnership opportunity for exclusive personal gain. Required by law to
put the interests of the partnership ahead of his own.
Persons who wish to be associated in partnership should have a
partnership agreement, preferably one drafted by a lawyer
o Relationship of Partners to Outsiders
Should she enter into a contact that exceeds her actual authority, the
firm will still be bound unless the outsider knows or should know that her
authority has been limited in this way. The firm is obligated by virtue of
the doctrine of apparent authority
Joint and Several Liability
Individual and collective liability for a debt. Each liable party is
individually responsible for the entire debt as well as being
collectively liable for the entire debt
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