BUSINESS ORGANIZATIONS I:

SOLE PROPRIETORSHIPS AND

PARTNERSHIPS

MGSC30H3
Instructor: Joseph Guiyab
Business Organizations
 There are Four Types of Business Organizations we will cover:
1) Sole Proprietorship
2) Partnership
3) Trust
4) Corporation
 The type of business organization determines:
o The rights and liabilities (i.e. who can be sued) of the people who are
involved in the business
o Who can profit from and bears the loss of the business
o Who may operate and manage the organization and the extent of their
responsibilities
o The manner in which the business can raise funds and pay taxes
Sole Proprietorship
 One person carrying on business
 Sole proprietorship can be carried out in the name of the owner or with a
business name
 Laws which generally apply to the business also apply to sole
proprietorships, such as licensing and regulation
 No separation between business and proprietor (owner):
o proprietor entitled to all income and all obligations
o proprietor’s assets available for business debts
o business income/loss = personal income/loss (tax benefits)
o proprietor cannot be employee of business (they can employ others)
Sole Proprietorship
 Advantages
o No formalities required
o Simple to start the business
o Easy to dissolve
 Disadvantages
o Unlimited personal liability – the sole proprietor is personally liable for
all torts and breaches of contract, including those committed by employees
• That means the proprietor can be sued in his / her own name and, if
they lose, they will have to pay damages using their own money or
assets
o Money raised only by personal borrowing
Partnerships
 Partnership – “A relationship between two or more persons
carrying on business in common with a view to profit.”
 Three-part test for the existence of a partnership:
o Two or more people
o Carrying on a business together
o With a view to profit
 Created by common law, but some jurisdictions have codified this
relationship and its terms (e.g. Partnerships Act in Canadian
provinces)
Kinds of partnerships
 For purposes of this course, we will study 3 types of partnerships:
o The General Partnership (most common)
o Limited Partnerships (investment vehicle)
o Limited Liability Partnerships (for certain professions)
 There are other specialized forms of partnerships that exist in other
jurisdictions (e.g. Limited Liability Limited Partnerships in the U.S.
which are formed in the context of specific investments).
Creating a General Partnership
 There are many ways to create a general partnership
o Usually done through written agreement
o Oral agreement
o Or the partnership can be created by conduct – actions of the
parties
 Court may decide that persons are partners, regardless of what they
call their relationship
Indicators of a General
Partnership
 What is “carrying on business”
o Owning property is not by itself carrying on business (e.g. collection
of rent)
o Single venture or one-time effort may, or may not, constitute carrying
on business
o Hobbies (game collecting) not usually a business
 What is “a view profit”
o The intention to make a profit
o In general, partners share the profits of the business
o Profits are calculated after expenses, so sharing gross revenues, or
charging a royalty, does not imply a partnership
Indicators of a General
Partnership
 Other indicators of partnership
o Participation in managing the business
o Partners make capital contributions or other contributions to the
business
o Partners sharing profits and losses
o Partners generally work together as equals in the business, or share in
proportion to their capital contribution
o Joint authority for contracts and bank accounts
o Partners having equal access to business information
o Partners holding each other out as partners
o Engaging in ongoing activity rather than one project
General Partnership – Legal
Relations of Partners
 A partnership is not a separate legal person
o Partners are collectively known as the “firm” which partners
leave and join
o Partnership property is not owned directly by the partners but
is brought into the partnership
o Partnership can sue and be sued in its own name
 Key issues
o Entering and leaving the partnership
o Managing the business of the partnership
o Capital contributions
General Partnership – Liability
of Partners
 Partners are personally liable for the debts and liabilities of the
partnership
o Mortgages, loans, contracts
o For tort liability such as negligence
 Partners are jointly liable
o A suit against the partnership applies to all partners of the firm
at time liability was created
o Personal assets can be used to satisfy the claim
o The person injured claims whole amount against any partner,
who then has rights of contribution against other partners
General Partnership – Liability
of Partners
 Partners are agents of the partnership: the acts of one partner bind
all partners
o This applies even if the other partners did not agree with the
course of action
 Anyone “apparently” a partner will bind the partnership
 Liability of retiring partners – Acts and claims before and after
retirement
General Partnerships – Implied
Terms
 Default provisions of the Partnerships Act apply to all partnerships unless
altered by contract
 Partnerships Act implies many terms (these can be altered by agreement
between the partnership):
o Equal share of capital and profits
o No entitlement to interest on partnership capital
o Cannot pledge or assign partnership interest
o All partners entitled to participate equally in management of the
partnership
o All partners have right to review books, records
o Decide ordinary matters by majority vote
o Admitting new partner and fundamental change in business each need
unanimous consent
o Death or insolvency of partner, or notice by a partner dissolves
partnership
General Partnerships – Implied
Terms
 Partnership Property
o All property “brought into” the partnership is partnership property, to
be used only for the partnership business
o Not owned by any particular partner
o Written agreements can set this out
 Financial Arrangements
o Partnerships Act Rule: all partners share equally in capital and profits
o Can vary equal balance to recognize differences based on amount of
contribution or length of service or some other criterion
o Written agreements set this out
General Partnerships – Implied
Terms
 How partners get paid
o Partners paid out of profit, not from capital
o No partner is entitled to remuneration for acting in partnership
business
o So partners not paid a salary, and any amounts paid to a
partner are not deductible as expenses
o Partners usually draw advances against yearly payments of
profits – calculated in advance
o Partners incurring expenses in the ordinary course of business
of the partnership are entitled to be indemnified (reimbursed)
by the firm
General Partnerships –
Fiduciary Duties
 Partners have a “fiduciary” relationship to one another and to the
partnership. Partners have to put partnerships interests ahead of
their own or third parties.
 One definition:
o “ …essence of a fiduciary relationship is that one party exercises
power on behalf of another and either expressly or impliedly
pledges to act in the other's best interest. The ability to exercise
that power in a damaging way is what makes the imposition of a
fiduciary duty necessary.”
 Fiduciary duties of partners include:
o Partners must render true accounts and full information
o Partners must account to the firm for any benefit derived from the
business or property of the partnership, unless the partners consent
o Partners must not compete with the partnership business
General Partnership –
Termination
 Expulsion of partner – Unanimous vote
 Retirement of partners
o Partners can retire by providing notice
o Governed by partnership agreement – mandatory retirement
 What happens on death/insolvency of partner?
 Implied provisions of the Partnership Act
o Termination on fixed term (e.g. 2 years)
o Termination by notice
o Termination by death or insolvency of any partner
Limited Partnerships
 Limited Partnerships (LPs) are a vehicle for investors not active
in management of the partnership
 Investor partners have limited liability
 These partners treat the LP as an investment, often to obtain
profits or benefit from tax losses which ”flow through” to them
(e.g. films)
Limited Partnerships -
Characteristics
 Each LP has:
o At least one general partner (most commonly a corporation)
• Manages the business for the partnership
• Has standard unlimited liability
• Able to sign on behalf of the LP on documents
o One or more limited partners
• Do not participate in management
• Liability limited to amount of contributions
• Activities of limited partners can cause them to be deemed
general partners
Limited Liability Partnerships
 Limited Liability Partnerships (LLPs) are a creation of statute
o LLPs can reduce liability to some extent
o LLP’s only apply if the business is one of a profession governed by
statute (chartered accountants and lawyers)
 A LLP is created
o By written agreement between partners
• This agreement sets the rules responsibilities of the partners
within the LLP
o By registering the LLP with the relevant government and industry
governing body (CPA Ontario, Law Society of Ontario)
o By using “LLP” at the end of the name
Limited Liability Partnerships –
Labilities of Partners
 A partner in an LLP is NOT liable for:
o Negligence or intentional acts of other partners, employees or
agents acting in the course of the partnership business
 A partner in an LLP is liable for:
o Their own negligence and intentional acts
o The negligence and intentional acts of persons under their
supervision
 The LLP is liable for the acts of its partners, employees and agents
o LLPs have assets and insurance to cover potential liabilities
Example Cases – What Business
Structure Should They Use?
1) X shovels his neighbours’ driveways during the winter to earn some
extra cash. When it is particularly busy or snowy, X asks his brother
Y for help and they split the cash.
2) A and B want to start a handyman repair business where they will do
odd repair jobs for clients. A and B only have 50% of the funds
needed start the business (i.e. buy equipment, advertising, etc.). C
wants to invest in A and B’s business and has the funds to do so;
however, C does not want to be involved its operations.