Chapter6: Sole Proprietorship, Agency, and Partnership Flashcards
1
Q
What is Sole Proprietorship?
A
- One owner who owns all business assets; entitled to all profits and responsible for all debts.
- Employees may be hired but success/failure depend on the sole owner.
- Licensing of services is required by trades, professions and most municipalities to ensure the qualifications of those offering services to the public.
2
Q
What are the disadvantages of Sole Proprietorship?
A
- Personal risk: Personal assets of the owner are not discrete from the business assets and therefore vulnerable to business debt.
3
Q
What is the Agency Relationship?
Figure 6-1
A
- Agent: person/business who acts on behalf of a principal, usually according to the terms of an agent-principal contract (mat be verbal, written, created by conduct or estoppel).
- If the duties described in the agent-principal contract are carried out only as contemplated by the agreement, the principal will be bound by the acts of the agent.
4
Q
Agency Relationship: What are the duties of a Principal to an Agent?
A
- Principal: Person on whose behalf an agent acts.
- Goal of an agency relationship: agent’s negotiation, acting within the scope of his/her authority of contracts between the principal and 3rd parties.
- In a relationship agent-principal, the principal has several duties: payment of agent’s fees for services rendered, payment of compensation for expenses incurred by the agent.
5
Q
Agency Relationship: What are the duties of an Agent to a Principal?
A
- Obedience along with confidentiality.
- Full up-to-date disclose, maintenance of current professional skills.
- Must act only for a principal and only in his/her best interests, and must keep funds received for a principal in a trust account.
6
Q
Agency Relationship: What is Agency by Conduct?
A
- An agency relationship inferred from the actions of a principal.
- If there is no express agreement between a principal-agent, an agency relationship may arise by words/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 third party cannot later deny it since it has created an agency by conduct/estoppel. This even though the agent’s authority is not real.
7
Q
Agency Relationship: What is Operation of Law and Ratification?
A
- Ratification: Adoption of a contract or act of another by a party who was not originally bound by the contract or act.
- An agency of necessity may be created in the event of an emergency if a pre existing legal relationship is already in place between agent/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.
8
Q
Agency Relationship: What are third parties and the agent relationship?
Figure 6-2
A
- The principal is liable to third parties in cases where the agency relationship is clearly stated, where the agent is acting within his/her authority, or where there is agency by estoppel.
- An agent who holds out to be a contracting party, who acts for an undisclosed principal without explaining the fact to a third party, or claims to act for a fictitious non existent principal is liable to the third party.
9
Q
Termination of an Agency Relationship
A
- The relationship may end after a specified time, by notice of one of the parties, by incapacity of one of the parties, by completion of a particular task, or by bankruptcy on the principal.
- To avoid ongoing liability, a principal should notify third parties when an agency relationship has been terminated.
10
Q
What is the Law of Partnership?
A
- Partnership: Relationship between 2 or more persons who carry on a business with a view to profit. Partnerships are governed by provincial/territorial legislation.
- Limited Liability Partnership (LLP): Hybrid between the partnership and the corporation.
11
Q
What is the Nature of a Partnership?
A
- 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.
- Carrying on 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.
12
Q
What are the differences between Partnership and Co-ownership?
A
- Partnerships are created by the express or implied contract; co-ownership occurs by transfer of a co-owner’s interest in property of 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.
13
Q
Liability of a Partnership for the Acts of the Partner. Figure 6-3.
A
- Every partner is an agent of the firm (partnership that carries on business) capable of binding the firm in contracts with other parties, and who can create liability for the firm by committing careless/improper acts.
- A partner is jointly and severally liable for partnership losses (personal liability).
14
Q
What are the rights & Duties of Partners to one another?
A
- All property/money brought into the partnership is for the benefit of the partnership.
- Duty of utmost good fate.
- Place the best interest of the partnership above any personal, render true accounts of money/information, avoid any competition with the firm.
15
Q
How is the Dissolution of a Partnership?
A
- May end by wish of dissolution, or if it is for a fix term it will terminate automatically.
- If its purpose becomes unlawful, by death, insolvency, incapacity to partner.
- If one partner’s behaviour is prejudicial to the business, if there is wilful breach of contract, or if a court finds a just and equitable reason to do so.
