11) Unincorporated Firms Flashcards
What is a sole proprietorship?
A sole proprietorship, also known as the sole trader or simply a proprietorship, is a type of business entity that is owned and run by one natural person and in which there is no legal distinction between the owner and the business.
- There is only one estate, the sole proprietor owns all assets in his personal capacity
- If the sole proprietor dies, the business dies as well.
What is a partnership?
A partnership is the legal relationship (not a separate legal person) which arises from an agreement between at least two people, in terms of which each contributes towards a business carried on in common with the object of obtaining mutual material benefit.
Essentialia of partnership contract thus:
- Agreement/Contract
o Doesn’t have to be in writing, can be verbal.
o Court can also infer that, by the way you are acting, you are intending to run the business as a partnership.
What are the requirements for a valid partnership agreement?
Each partner must make a contribution:
- Asset, labour, etc.
o Can also contribute the use of an asset
o Not entitled to compensation for their contribution
- Even if you undertake to contribute in the future; that is sufficient.
Business must be carried on for the joint benefit of the partners;
Objective must be to make a profit;
Contract between the parties should be a legitimate contract;
(Other general legal requirements for a valid contract).
What is the difference between aggregate theory and entity theory?
Entity theory treats the whole partnership as a separate single entity.
Aggregate theory treats the partnership as the aggregate of the partners (together in their own right - each one obtains their own separate right).
South African law does not consider a partnership a separate entity, but there are a few exceptions for practical purposes.
What are the instances where the partnership is not treated as a separate legal entity?
Insolvency
When a partnership is insolvent, the creditor is going to sequestrate the partners personally. Partnership fund is sequestrated separately and simultaneously with the individual partners.
- (Still not a separate entity - just an exception).
- Jointly liable for the debts
Litigation
When you sue the partnership, you would have to sue all the partners
VAT
The partnership is able to register as a VAT vendor. This does not mean it is a separate entity. The individual partners pay tax.
What is a partnership fund?
Each one of the partners owns each of the assets equally. They own them jointly and in undivided shares.
- This is reflected by means of a partnership fund.
What are the rights of partners?
Right to a share of the profits of the partnership
- in the absence of an agreement, profits are split according to the partners contribution)
Right to participate in the management of the business (one partner cannot enter into an agreement that isn’t agreed upon by all the other partners)
Right to inspect the partnerships books
Right to the distribution of assets upon dissolution
What are the duties of the partners?
Contribution
- Essential requirement is that partners make a contribution and that contribution becomes an enforceable right.
Sharing of management
- Can’t be excluded from participating in management.
Use of partnership property
- Partners don’t own the property , therefore cannot use it for their own personal use.
Reasonable care
- Must show same degree of care that they would exercise in their own affairs
Good faith
Access to books
Account
- Annually a partnership must account for any partnership property they have under their control
Sharing of profits
Rendering of accounts
What are the consequences of the Duty of Good Faith?
Will render the contract unenforceable if entered into by a partner with a third party in breach of it.
Duty of non-preference arises
- The partner must not place their own interests before those of the partnership.
Partner may not buy partnership property without the consent of his/her co-partners.
Breach of duty of good faith will normally entitle a co-partner to claim a dissolution of the partnership.
What are the limitations to liability of partners to third parties?
Third party cannot claim against the silent partner, but the silent partner is liable to the other partners (share in profits and losses)
- Upon insolvency, the silent partner will get sequestrated along with their fellow partners.
Commanditarian partners are not liable to third parties and they have limited their liability to a specific amount to fellow partners
- If the court sequestrates a partnership, the partnership fund as well as each and every individual partner, gets sequestrated except for en commandite partners
What are the principles relating to authority with regard to partners liability to third parties?
The onus is on the third party to show that the contracting party had authority to bind the partnership.
Authority may arise in a number of ways:
- Express provision of the partnership agreement
- Implied from:
o Partnership agreement
o Customary dealing of the partnership
The third party may raise estoppel against the partnership, estopping the co-partners from denying liability and ostensible authority.
What is a mutual mandate?
Mutual mandate is a lot like ostensible authority (through the principals conduct the third party was given the impression that the principal had given the agent authority); it is to protect third parties dealing with the partnership.
Partner contracts with third party without authorisation:
- The moment that the contract is concluded in the ordinary scope of the partnership business, it is then binding (within the mutual mandate of the partnership)
What is the difference between civil liability and criminal liability for partners to third parties?
Criminal Liability:
Since a partnership has no identity distinct from its members, it cannot, as such, commit an offence, and it cannot therefore be prosecuted.
General rule:
- A partner is not liable for the criminal conduct of a co-partner.
- There isn’t a law on criminal liability, if one commits a crime, you cannot hold the other partners liable (unlike civil liability)
What is a trust?
A trust is a legal relationship that has been created by/in a trust deed and it has the following key characteristics:
- The relationship is created by a person known as the founder/donor.
o The founder places assets under the control of another person/s known as the trustee/s.
o This is either done during the founders lifetime (inter vivos) or after his death (mortis causa)
o The purpose of setting up a trust is to benefit third persons known as the beneficiaries.
A trust may exist even if it is not in writing, however, in practice, a trust does not work without it being created in a trust deed (written).
- Large degree of privacy.
- Separation of ownership and control from the beneficiaries.
- The trustee in fact owns the assets of the trust but in their official capacity. A representative capacity, not their personal capacity.
o Litigation against the trust is against the trustee, but in their official capacity - not in their personal capacity.
- If the trustee misuses the assets and does not do his duty, he can be sued in his own personal capacity.
What are the types of trusts?
“Inter vivos”
- While the person is alive; during the founders lifetime.
“Mortis causa”
- After the death of the founder
o E.g. A will
Bewind Trust
- Ownership does not sit with the trustee.
o Ownership is with the beneficiaries and the trustee just manages the trust.
