Sole Proprietorship, Agency, and Partnership 6 Sole Proprietorship, Agency, and Partnership © 2008 McGraw-Hill Ryerson Ltd. All Rights Reserved. © 2008 McGraw-Hill Ryerson Ltd., All Rights Reserved.

OBJECTIVES To survey various forms of business organizations and the legal environment associated with each To outline the effects of law upon sole proprietorship and partnership To examine the way the law of agency impacts upon these forms of business organization Fundamentals of Canadian Business Law, Second Edition © 2008 McGraw-Hill Ryerson Ltd. All Rights Reserved

FORMS OF BUSINESS ORGANIZATION Given the hindsight brought to carrying on business by the law, it is not surprising that the business world is highly regulated Even the most simple business structure must comply with regulations, licences and other obligations in return for a right to offer services The goal of these legal rules is the protection of the general public and of other business persons from the unscrupulous or unlicensed Fundamentals of Canadian Business Law, Second Edition © 2008 McGraw-Hill Ryerson Ltd. All Rights Reserved

SOLE PROPRIETORSHIP A sole proprietorship has one owner who owns all business assets, is entitled to all profits and is responsible for all debts Employees may be hired, but successes or failures depend on the sole decision maker Licensing of services is required by trades, professions and most municipalities to ensure the qualifications of those offering services to the public Fundamentals of Canadian Business Law, Second Edition © 2008 McGraw-Hill Ryerson Ltd. All Rights Reserved

SOLE PROPRIETORSHIP: DISADVANTAGES The freedom of sole proprietors, the flexibility, speed and agility of their businesses in responding to business opportunities, is counter balanced by personal risk The personal assets of a sole proprietor are not discrete from the business assets and are therefore vulnerable to business debt Insurance may help to allay concerns for certain types of business liability Fundamentals of Canadian Business Law, Second Edition © 2008 McGraw-Hill Ryerson Ltd. All Rights Reserved

THE AGENCY RELATIONSHIP An agent is a person or business who acts on behalf of a principal, usually according to the terms of an agent-principal contract for service If the duties described in the agent-principal contract are carried out as contemplated (and only as contemplated) by the agreement, the principal will be bound by the acts of the agent A principal-agent agreement may be verbal, in writing, or created by conduct or estoppel Fundamentals of Canadian Business Law, Second Edition © 2008 McGraw-Hill Ryerson Ltd. All Rights Reserved

DUTIES OF A PRINCIPAL TO AN AGENT The goal of an agency relationship is usually the agent’s negotiation, acting within the scope of his or her authority, of contracts between the principal and third parties In the utmost good faith relationship between an agent and principal, the principal has several duties, including the payment of the agent’s fee for services rendered, as well as the payment of compensation for expenses incurred by the agent in the performance of services Fundamentals of Canadian Business Law, Second Edition © 2008 McGraw-Hill Ryerson Ltd. All Rights Reserved

Fundamentals of Canadian Business Law, Second Edition © 2008 McGraw-Hill Ryerson Ltd. All Rights Reserved

DUTIES OF AN AGENT TO A PRINCIPAL Obedience of lawful instructions from a principal is the foremost duty of an agent, along with the duty of confidentiality Further, there is a requirement for full and up-to-date disclosure by an agent to a principal, as well as the maintenance of current professional skills An agent must act only for a principal and only in his or her best interests, and must keep funds received for a principal in a trust account Fundamentals of Canadian Business Law, Second Edition © 2008 McGraw-Hill Ryerson Ltd. All Rights Reserved

AGENCY BY CONDUCT If there is no express agreement between a principal and an agent, an agency relationship may arise by words or conduct which convey to a third party the impression that an agent has authority to represent a principal If a third party relies on this impression, the principal cannot later deny it since it has created an agency by conduct or estoppel This is so even though the agent’s authority is not real Fundamentals of Canadian Business Law, Second Edition © 2008 McGraw-Hill Ryerson Ltd. All Rights Reserved

OPERATION OF LAW & RATIFICATION An agency of necessity may be created in the event of an emergency if a pre existing legal relationship is already in place between and agent and principal In the emergency, the agent acts for the principal without instructions in order to prevent a loss An agent acting without authority may also enter into a contract with a third party which a principal, after the fact, decides to ratify Fundamentals of Canadian Business Law, Second Edition © 2008 McGraw-Hill Ryerson Ltd. All Rights Reserved

THIRD PARTIES AND THE AGENCY The principal is liable to third parties in cases where the agency relationship is clearly stated, where the agent is acting within his or her authority, or where there is agency by estoppel An agent who holds him or herself out to be a contracting party, who acts for an undisclosed principal without explaining the fact to a third party, or who claims to act for a fictitious non existent principal, is liable to the third party Fundamentals of Canadian Business Law, Second Edition © 2008 McGraw-Hill Ryerson Ltd. All Rights Reserved

TERMINATION OF AGENCY RELATIONSHIP An agency may be terminated in a number of different ways It may end after a specified time, by notice of one of the parties, by the incapacity of one of the parties, by completion of a particular task, or by bankruptcy on the part of the principal To avoid ongoing liability, a principal should notify third parties when an agency relationship has been terminated Fundamentals of Canadian Business Law, Second Edition © 2008 McGraw-Hill Ryerson Ltd. All Rights Reserved

THE LAW OF PARTNERSHIP A partnership is a relationship between two or more persons who carry on business together with a view to a profit Partnerships are governed by provincial and territorial legislation Partnership law has recently developed a hybrid between the partnership and the corporation known as the limited liability partnership (LLP) Fundamentals of Canadian Business Law, Second Edition © 2008 McGraw-Hill Ryerson Ltd. All Rights Reserved

NATURE OF A PARTNERSHIP The carrying on of business with a view to making a profit excludes from the scope of a formal partnership associations such as charities, social clubs and amateur sports clubs The sharing of net profits is one of the hallmarks of a partnership, as are the actions of contribution to capital, participation in decision making, and personal liability for partnership losses Fundamentals of Canadian Business Law, Second Edition © 2008 McGraw-Hill Ryerson Ltd. All Rights Reserved

PARTNERSHIP VERSUS CO-OWNERSHIP Partnership arises by express or implied contract; co-ownership occurs by transfer of a co-owner’s interest in property or inheritance A partner is an agent of each of the other partners; a co-owner is not an agent of other co-owners A partnership is governed by partnership legislation and dissolution processes; legislation associated with jointly held property governs co-ownership Fundamentals of Canadian Business Law, Second Edition © 2008 McGraw-Hill Ryerson Ltd. All Rights Reserved

LIABILITY FOR ACTS OF A PARTNER Every partner is an agent of the firm who can bind the firm in contract with third parties, and who can create liability for the firm by committing careless or improper acts A partner is jointly and severally liable for partnership losses Because of this exposure to personal liability for the conduct of another, partners should be selected carefully Fundamentals of Canadian Business Law, Second Edition © 2008 McGraw-Hill Ryerson Ltd. All Rights Reserved

Fundamentals of Canadian Business Law, Second Edition © 2008 McGraw-Hill Ryerson Ltd. All Rights Reserved

RIGHTS AND DUTIES OF PARTNERS Under partnership legislation, all property and money brought into the partnership, as well as any newly acquired property, is for the benefit of the partnership Partners owe a duty of utmost good faith to one another Partners must place the best interest of the partnership above any personal interest, render true accounts of money or information, and avoid any competition with the firm Fundamentals of Canadian Business Law, Second Edition © 2008 McGraw-Hill Ryerson Ltd. All Rights Reserved

DISSOLUTION OF A PARTNERSHIP A partnership may be ended by giving notice of a wish to dissolve, or if it is for a fixed term, it will terminate automatically A partnership may end if its purpose becomes unlawful, or by the death, insolvency or incapacity of a partner If one partner’s behaviour is prejudicial to the business, if there is a wilfull breach of contract, or if a court finds a just and equitable reason to do so, the partnership will be dissolved Fundamentals of Canadian Business Law, Second Edition © 2008 McGraw-Hill Ryerson Ltd. All Rights Reserved

LIMITED PARTNERSHIPS A limited partnership is a special form of partnership requiring at least one general partner but allowing one or more limited partners The liability for loss of a limited partner does not extend beyond his or her capital contribution; however, they may be deemed general partners by a court if they participate in the management of the business, place their name on firm letterhead or include their name in the name of the firm Fundamentals of Canadian Business Law, Second Edition © 2008 McGraw-Hill Ryerson Ltd. All Rights Reserved

LIMITED LIABILITY PARTNERSHIPS In a limited liability partnership (LLP), the unlimited liability of each partner for the general debt of the partnership is the same as in a regular partnership, and each partner is liable for his or her own negligence The distinction arises from the fact that individual partners are not liable for the negligent acts of the other partners Every partner must carry liability errors and omissions insurance to cover him or herself Fundamentals of Canadian Business Law, Second Edition © 2008 McGraw-Hill Ryerson Ltd. All Rights Reserved

REGISTRATION OF PARTNERSHIPS Registration of partnerships is not uniformly required across Canadian provinces and territories, though most require it if the partners are carrying on business under a name other than their own The declarations that are filed in specified public offices contain the names and addresses of the partners, the date the partnership came into existence and a statement that each partner is of the age of majority Fundamentals of Canadian Business Law, Second Edition © 2008 McGraw-Hill Ryerson Ltd. All Rights Reserved

JOINT VENTURES A joint venture is an utmost good faith relationship arising by contract when two or more businesses undertake a special project together The project is usually substantial, involving a plan to combine the capital, equipment and expertise of each for a specific time period Once the joint venture is complete, there may or may not be any ongoing relationship contemplated between the companies Fundamentals of Canadian Business Law, Second Edition © 2008 McGraw-Hill Ryerson Ltd. All Rights Reserved

Fundamentals of Canadian Business Law, Second Edition © 2008 McGraw-Hill Ryerson Ltd. All Rights Reserved

SUMMARY The sole proprietorship is informal and flexible, allowing the individual owner to be responsive to business opportunities A partnership involves two or more persons entering a business with a view to making a profit, each being an agent of the partnership Personal liability may arise for both sole proprietors and partners, although limited partnerships and limited liability partnerships afford some degree of protection from liability Fundamentals of Canadian Business Law, Second Edition © 2008 McGraw-Hill Ryerson Ltd. All Rights Reserved