Ch.16 Law of Sole Proprietorship and Partnership

Question 1

Sole proprietorship

Answer 1

business where the sole owner is responsible for the management, debts and liabilities of the business

• Simplest form of business
• Sole proprietor owns all assets, entitled to all profits and responsible for all debts
• Unlimited personal liability
• Limited ability to raise capital
• Requires registration or licensing of business
• Few tax advantages

Question 2

Partnerships

Answer 2

legal relationship between two or more parties for the purpose of carrying on a business with a view to a profit

• Provides additional management expertise and capital i.e. growth and development
• Partners possess greater interest in success business than do employees
• Partnership, and each partner individually is liable and responsible for each other partner
• Excludes all non-profit associations / organizations

Question 3

Nature of a Partnership

Answer 3

Sharing of net profits of a business is prima facie evidence of existence of a partnership

• Agreement between the parties
• Contribution of capital
• Active participation in management
• Part ownership or co-ownership not necessarily a partnership

Question 4

Differences between partnerships and co-ownership:

Answer 4

Partnerships
- Contractual
- Mutual trust
- Partner agent of other partners and the partnership
-Partners share in partnership property is always personalty
- Subject to partnerships act

Co-ownership
- Arise in several ways (e.g. inheritance)
- Freely alienable without consent of other co-owner
- Not an agent of other co-owners
- Co-owners can own any type of property i.e. personalty or realty
- Dissolved through disposition of property

Question 5

Liability of a Partnership

Answer 5

Persons who form a partnership are collectively called the firm and business is carried on in firm’s name

• Joint and several liability - partners individually and as a collective group have liability for a debt of the partnership
• Partners are agents for each other and for the partnership
• Liable for tort of partner if committed in course of partnership business
• Joint and several liability for business wrongs i.e. misappropriation, negligence, etc.

Question 6

Liability (Employees)

Answer 6

Partnership firm is the employer

• Partners responsible for direction and supervision of employees
• Liable for a tort committed by an employee
  – If committed in performance of partnership business
• Liability in contract
  – If employee authorized to enter into such contracts

Question 7

Partnership agreement:

Answer 7

Partners free to set out rights and duties with respect to each other

Does not have to be in writing but if not, rights and obligations defined in Partnership Act

Property brought into the partnership is partnership property

Land is held in trust for the partnership

Question 8

Rules in Partnership Act:

Answer 8

1. Equal share in capital and profits, and must contribute equally to losses
2. Indemnity by the firm for personal payments and personal liabilities
3. Interest of 5% paid on excess capital contributions
4. Not interest before profit
5. Not every partner may take part in management
6. No remuneration for acting in the business
7. No new partners without consent of others
8. Differences arising may be decided by majority of partners but no change in nature of partnership without consent of all existing partners
9. Books to keep at place of business of partnership and every partner has access

In absence of express agreement, majority of partners may not expel any partner

Question 9

Dissolution of a Partnership

Answer 9

Can be set forth in the partnership agreement

Dissolve automatically at end of term set in agreement

Death or insolvency of a partner

Mentally unsound or incompetent

Breach of partnership trust

Question 10

Dissolution

Answer 10

termination of the partnership relationship

Question 11

Once notice of dissolution given:

Answer 11

Liquidation of assets

Determine partners’ share

Set order of payment of debts from liquidation is set out in Act and in partnership agreement

Must notify customers of dissolution

Partners liable for debts of partnership during time as partner

Question 12

Limited Partnership

Answer 12

partner who may not actively participate in the management of the firm, but has limited liability

• Seldom used for ordinary small businesses
• Limited partner can become a general partner if one takes an active role in management
• May advise (Example: hotel operations)

Question 13

General partner

Answer 13

full partner with unlimited liability for the debts of the partnership

Question 14

Limited Liability Partnerships

Answer 14

Limited liability partnership (LLP) - partnership where individual partners are liable for the general debts of the partnership and for personal negligence but not personally liable for the negligence of other partners

• Narrowly available only to eligible professions
• Negligent partner and firm itself liable for loss
• Remaining partners not held personally liable
• Most provinces have created LLP legislation

Question 15

Joint venture

Answer 15

business relationship between corporations

Can be between two or more corporations or business entities

Question 16

Tax advantages to partnerships:

Answer 16

Income of a partnership “flows through” the partnership without taxation

Taxed at the hands of the partners individually

Question 17

Registration of Partnerships

Answer 17

Requirement of registration:

• Varies by province
• Declarations require that partners disclose:
  – Name of partnership
  – Names and addresses of all partners
  – Date of commencement of partnership
  – Fact that all partners are of age of majority

In some provinces partnership cannot defend or institute legal proceedings if it not registered