Chapter 1: Forms of Business Enterprise

Question 1

How is a Partnership different from a sole proprietorship?

Answer 1

They are both very similar, except partnerships have more people in the business. Partners have unlimited liability but it is spread between all partners.

Question 2

What are some of the benefits to a Partnership relative to sole proprietorship?

Answer 2

1) They allow you to bring in the expertise and skill of other people
2) A method of acquiring capital (if partners are required to buy-in)

Question 3

What are the elements of partnership?

Answer 3

1) It must carry on business
2) In Common
3) With a view to a profit

Question 4

What happens in Backman?

Answer 4

The case is about whether a business was established with a view to profit. Backman bought a partnership interest in a US apartment complex. The partnership was sold back immediately afterwards so that Backman could gain millions from a tax deduction. If a partnership does not exists then the tax deductions are wrongly claimed.

Question 5

How does Backman apply the partnership elements?

Answer 5

1) Carrying on Business:
Partnerships do not require creating new business and partnerships can be established for a single transaction.

2) In Common

Consider the nature of the relationship. if the mgmt of a partnership rests with a single person then the partnership may still exist.

3) With a view to profit
Must inquire into the party’s intention – NOT the motivation –. Motivation stimulate an action, while intention is an objective.

Question 6

What happened in Spire Freezers?

Answer 6

Factually similar to Backman. Appellants acquired a partnership interest with two American corporate partners that owned two properties: a luxury condominium and a low-rent apartment complex. The condo was immediately sold back to one of the American partners, but the appellants kept and managed the apartment complex after becoming aware of its potential profitability.

Because the apartment complex continued to be managed with a view to profit, the tax losses were deductible– unlike in Backman.

Question 7

What do the statutory regulations say about setting up a partnership?

Answer 7

There ARE NO statutory provisions for setting up a partnership. Thus, courts infer the existence o a partnership under common law and the provincial Partnerships Act (section 27).

Question 8

How does a court infer the existence of a partnership?

Answer 8

The court will look to the objective intentions of the parties as determined by: The right to share in profits, the right to share in losses, and the degree and control over the business.

This is an objective test to determine subjective intent and so must be based on objective evidence (Spire Freezers).

Under common law there is no requirement to make a capital contribution to be considered a partner.

Question 9

What are the legal requirements for forming a Partnership?

Answer 9

Register your partnership under the Partnerships and Business Names Registration Act. There is an annual registration fee. If you don’t register then the courts may still infer partnership. However, the consequence are a small fine and the inability to commence actions through the partnership.

Question 10

Boudreau v Pierce

Answer 10

Flowershop case. Illustrates the importance of a partnership agreement.

The flower shop started as a sole proprietorship. The owner contributed all the start up capital and then asked his employee to beome a partner. They had a falling out and on dissolving the partnership the owner claimed that he should not have to share the capital he personally invested.

The court infers a partnership and decides that there was no agreement to rebut the common law presumption of an equal share of assets on dissolution. A partnership agreement would have avoided this.

Question 11

Do partners have any fiduciary duties to one another?

Answer 11

Yes! There are two: (1) Duty of skill and care, and (2) a duty of good faith. If these are violated then there are serious legal consequences.

Question 12

Are partners liable for the actions of each other?

Answer 12

Yes. However, there is an exception to unlimited liability: if the person acting has no authority to act in a particular manner and the person with whom he or she is dealing knows that they don’t have that authority then you will not be liable–> Section 8 of the Partnership Act.

Question 13

How is a partnership dissolved?

Answer 13

At common law, by a partner’s death, expulsion, breach of fiduciary duty, or bankruptcy.

It can be dissolved by court order, at the will of all partners, or any triggering event specified in the partnership agreement.

Question 14

How do you form a Limited Partnership?

Answer 14

It MUST be formed under the Limited Partnership Act. No similar concept under common law.

Question 15

What happens in a LP if the General Partner dies or quits?

Answer 15

The partnership dissolves, even if there are limited partners. This is because the LPs have no say in the management of the business. You cannot even say in a partnership agreement that a given LP will ascend to fill the GP’s position on the GP’s death as that would create a new partnership.

Question 16

What happened in Haughton Graphic Ltd. v. Zivot?

Answer 16

The defendant (Zivot) incorporated Lifestyle Magazine Inc, and Lifestyle was the sole GP of Printcast (a limited partnership). Zivot and another were LPs in Printcast. Lifestyle and Haughton Graphic reached an agreement. The head of Haughton was introduced to Zivot as President of Lifestyle. While the head of Haughton knew that Zivot belonged to a LP, he had no idea that Zivot was an LP.

Haughton got judgment against Printcast. But, because the GP (Lifestyle Inc) was insolvent, Haughton got no money. They argue that Zivot was acting as GPs of Printcast as they took control of the business.

Test for GP: 1) Were they an LP? 2) did they take part in the control of the business?

Substance over Form

Question 17

What happened in Nordile Holdings Ltd. v. Breckenridge

Answer 17

Nordile sold land to Arman, an LP, under a substantial mortgage. Foreclosure proceedings were brought and Nordile got default judgment against Arman. However, because Arman is the general partner and was insolvenet, Nordile could not recover.

Breckenride is a LP in Arman. A minority shareholder, director, and officer of Arbutus. In agreed statement of facts, both Nordile and Breckenride knew Breckenride was acting only in their capacity as directors of the general partner Arbutus. As they were acting as directors of the GP that meant that they themselves were not acting as GPs.

Form over Substance

Question 18

What us a Limited Liability Partnership?

Answer 18

The partnership as a whole is liable to third parties, but the individual partners are not. This protects the partners’ personal assets, and it representation an ideological shift towards the unit theory.

As the partners’ assets are closed from liabilities, partners are required to maintain insurance.

Question 19

Where does a joint venture come from?

Answer 19

Entirely common law: CMHC v. Graham

Question 20

What happened in CMHC v. Graham

Answer 20

CMHC would supplement mortgage loans from banks to finance home purchases and developments in Canada. They entered into a contract with Bhadour Construction to finance and build homes in Cape Breton. This is clearly a business relationship but it was not explicitly or implicitly a partnership.

Graham, the defendants, bought an unfinished home out of the above relationship. With all the defects Graham didn’t pay. He defaulted on his mortgage and CMHC sued. Graham counterclaimed for faulty construction. CHMHC argues that the defects are Bhadour’s alone.

Graham argues that Bhadour and CMHC were in a joint venture and so CMHC should hold liability.

On the facts CMHC was acting more than a financier, it was pooling resources with Bhadour.

Question 21

What happened in Bramalea v 629023 Ontario?

Answer 21

Bramalea sold undeveloped property to the Numbered Company for the purpose of resale to a 3rd Party. Bramalea inserted a “to-build clause” so that neither the Numbered Company nor 3rd Party could speculate on property valuations. The 3rd Party bought the property but did not develop it. Numbered Company tried to buy the property back so that it could sell the property to somebody else.

When Bramalea learned that the to-build clause had been violated, Bramalea wanted compensation. Bramalea agreed not to recognize the breach while Numbered Company sold thel and to somebody else. Numbered Company sold at a substantial profit. Bramalea then sued the Numbered Company, not for breach, but for unjust enrichment.

Bramalea claimed that they were in a joint venture with Numbered Company and were entitled to a portion of the profit.

The court did not find a joint venture. No evidence that Bramalea had control over the project, or of a pooling of resources. A bald forbearance to exercise a legal right is not itself enough contribution to establish a joint venture.

Question 22

What is a cooperative?

Answer 22

Very much like a corporation. They must be incorporated through constitutional documents. Big difference is social objective behind a cooperative: cooperatives are not necessarily profit driven.

Question 23

What happened in Blue Line Hockey Acquisition v Orca Bay Hockey Partnership?

Answer 23

A bunch of people worked together to buy the Vancouver Canucks. One of them left the group and bought the team by himself. THe other two sued him for breach of fiduciary duty. They assert that as they were operating under a Joint Venture the rules of partnership should apply.

Court will not automatically impart a fiduciary duty between joint venture parties.

Not enough evidence of a a contractual or legal relationship between parties. An agreement to work together is not enough.

Court will look for an intention to create fiduciary duty.