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Textbook notes Ch 24.docx

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David Scallen

Law Chapter 24 Notes- Sole Proprietorships and Partnerships A sole proprietorship or partnership come into existence without government involvement. A corporation must be registered with the designated gov’t department. In some situations, a number of professions do not permit their members to carry on their practices in the form of corporation. Sole proprietorships : any individual that starts business has created a sole proprietorship. No formalities necessary • Laws regarding public health, zoning, and taxation apply to all business including this one. • May have to obtain a license to carry on a certain business (ex. electrician or restaurant) • Sole proprietor income is reported on the personal income tax form. *In most provinces, if business is carried under a name that is not the actual owner, they must be registered- hence, partnership. Partnerships : • A relationship • Between persons • Carrying on business in common • With a view of profit: sharing of profit is an essential element of partnership; the evidence that the person receiving a shared profit is contributing to the management of business is sufficient *The main problem with partnerships was the legal decisions being made. The courts look at the substance of the relationship and are not guided by what the parties may call themselves. Partnership act: defines partnership as a relationship as a relationship between persons carrying on a business with a view of profit; passed by the British Parliament in 1890 to solve the remedy of mass decisions on detailed points in decision making, which brought together numerous cases under more general principles and codified the law. It is generally accepted as an accurate representation of the state of partnership today. Case 24.2 remedy: there was no intention of carrying on a business so it was not considered a partnership. The sharing of profit does not by itself amount to a partnership if it is an arrangement to: • Repay a debt owed • Pay an employee or agent of the business as part of his remuneration (payment) • Pay an annuity to a widow, widower, or child of a deceased partner • Repay a loan • Pay the seller of a business an amount for goodwill that varies according to the profits A partnership is not treated as a separate entity from its owners. In accounting matters, a partnership may be treated as a separate entity with its own assets and ability to create its own liabilities, but at the end of the day, all assets and liabilities are the responsibilities of the partners. It is possible- upon agreement- that the partnership will continue even after one’s death, bankruptcy, or retirement. Partnership creditors have first call against partnership assets before the personal creditors of an individual partner b/c until the creditors of the partnership have been paid, it is impossible to identify and distribute the share of an individual partner. If the partnership assets are insufficient to pay off the partnership creditors, they must wait for the personal creditors to be paid out of the personal estate of the deceased partner before they can take what is left in order to satisfy their debt. For the legal purposes of proceeding a court action, a partnership may be treated as if it were a separate entity it might be smarter to do this to get more compensation anyway. A partnership agreement does not have to be in writing: it can be oral and still be valid and enforceable. It is just nice to have it in written agreement as a record. The main purpose of this is to set out, as carefully and clearly as possible, the entire terms of the relationship. Contents of a Partnership Agreement: • Identity of the partners • Name of the firm • Nature of the business to be carried on • Duration of the relationship • Method of terminating the partnership • Rules for introducing new partners • What happens when death or retirement happens • Participation in management and in major decision-making • Contribution of each partner in terms of work and responsibilities • Capital contribution of each partner • Ownership of property used in business • Sharing of profits and losses • Procedure for resolving disputes In order to have an effective partnership agreement, they must think of the most probable situations/issues that must be solved by the agreement. It does not matter whether or not the partnership has been registered. Contractual Liability Agency Principles: “Every partner is an agent of the firm and his other partners” unless the authority of the partner has been restricted by an agreement with the other partners and the third party knows of this restriction. Joint Liability: Each partner is personally liable for the full amount of the firm’s debts. When the liabilities of the firm exceed its assets, creditors might look into the personal assets of any partner or partners involved. *If a plaintiff, out of carelessness, sues someone for not having enough assets to pay her back, and figures out that there were other partners in the firm, her rights to sue will be exhausted. That’s why it is safer to sue the firm’s name. If a partner pays the firm’s debt in full, he is entitled to be reimbursed by his co-partners for their shares of the debt. A person who gives false representation to be a partner in a firm, is liable to the person who was affected by it. This is if the victim reasonably believes that the person was a partner of the firm.  effect of estoppel. The defendant in these situations, unless it was fraudulent, can use the Partnership Act to establish that there was no partnership intended. Ex. In situations such as a retired member who misrepresented partnership when he was not. To avoid any possible liability, the retiring member should: • Ensure that all existing clients of the firm are notified • Place a notice in the official gazette of the province • Ensure that his name is removed from the register • Anything with his name on it is removed or
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