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law 2101 Term 2 > Forms Of Business Organization - mod 11 > Flashcards

Forms Of Business Organization - mod 11 Flashcards

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1
Q

Law of agency

A
  • an area of commercial law dealing with a set of contractual, quasi-contractual and non-contractual fiduciary relationships that involve a person, called the agent that is authorized to act on behalf of another called the principal to create legal relations with a third-party
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2
Q

Agency

A
  • results in a legally binding agreement between the principle and third party
  • agency is an exception to the doctrine of privity
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3
Q

2 contractual relationships

A
  1. Main contract - between the principle and third party

2. Agency agreement- between the principle and agent

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4
Q

3 classes of agents

A

Lecture
- employees
- partners
- independent contractors
Textbook
- universal agents: hold broad authority to act on behalf of principle (lawyer)
- general agents: hold a more limited authority to conduct a series of transactions over a continuous period of time
- special agents: are authorized to conduct either only a single transaction or a specified series of transactions over a limited period of time

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5
Q

The agency agreement may cover:

A
  • the scope of authority
  • The duties to be performed
  • the fees to be paid
    Agency is usually created by contract
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6
Q

Actual authority

A
  • actual authority is the authority an agent actually has
  • two kinds: express and implied (or usual) actual authority
  • an agent is only entitled to protection from the principal if they have an acted within the scope of their actual authority, and if they act outside of that authority they may be in breach of contract, and liable to a third-party for breach of the implied warranty of authority
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7
Q

Apparent authority

A
  • apparent authority is the authority an agent appears to have
  • also called ostensible authority, exists where the principle’s words or conduct would lead a reasonable person in the third-party’s position to believe that the agent was authorized to act, even if the principal and the purported agent had never discussed such a relationship
  • If a principal creates the impression that an agent is authorized but there is no actual authority, third parties are protected as long as they’ve acted reasonably
  • this is sometimes termed agency by estoppel or the doctrine of holding out, where the principal will be estopped from denying the grant of authority if third parties have changed their position to their detriment in reliance on the representations made
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8
Q

Apparent authority comes from

A
  • the words or deeds of the principle (not the agent)
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9
Q

Liability of agent to third party

A
  • if the agent has actual or apparent authority, the agent will not be liable for acts performed within the scope of such authority, as long as the relationship of the agency and identity of the principal have been disclosed
  • when the agency is undisclosed or partially disclosed, however, both the agent and the principal are liable
  • where the principal is not bound because the agent has no actual or apparent authority, the purported agent is liable to the third party for breach of the implied warranty of authority
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10
Q

Liability of agent to principal

A
  • if the agent acts without actual authority, but the principle is nevertheless bound because the agent apparent authority, the agent is liable to indemnify the principal for any loss or damage
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11
Q

Liability of principal to agent

A
  • if the agent has acted within the scope of actual authority given, the principal must indemnify the agent for payments made during the course of the relationship whether the expenditure was expressly authorized or merely necessary in promoting the principal’s business
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12
Q

Ratification

A
  • if an agent exceeds their actual or apparent authority the principle can “ratify” or adopt the agreement
  • ratification may occur by conduct (i.e bank gives you the loan)
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13
Q

Unnamed principal

A
  • if the principle is unnamed (i.e. anonymous), then the agent has no apparent authority
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14
Q

Undisclosed principle

A
  • if the principle is undisclosed (i.e. it is unknown there is a principal), then the contractual relationship is between the agent of the third party
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15
Q

Duties of the agent:

A
  • fiduciary (best interests): highest duty in law, breach of trust, agent must act in best interest of principle
  • duty of care (act reasonably): negligence may result
  • contractual (honour the contract): agent must honour contract with the principle
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16
Q

Duties of the principle:

A
  • contractual (honour the contract, pay the agreed upon fees)
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17
Q

Vicarious liability

A

Principles are vicariously liable for:

  • agents who are employees acting in the scope of their employment
  • agents who are acting in the scope of the agency duties
  • sometimes fraud, theft, etc
18
Q

Termination

A

The internal agency relationship may be dissolved by agreement by:
1. Withdrawal by the agent
2. By the agent renouncing the business of agency
3. By discharge of the contractual agency obligations
Or by
1. Death
2. Insanity
3. Bankruptcy

19
Q

Partnership (form of business organization)

A
  • relationship between two or more people carrying on business together for profit
  • partnership can be comprised of individuals, corporations
  • advantages: low initial cost and simplicity, access to more resources because more owners are involved
  • disadvantage: The partners will be personally responsible for all of the debts and liabilities of the partnership business
20
Q

Factors relevant in determining whether a partnership exists:

A
  • the sharing of profits
  • the sharing of decision making
  • the sharing of capitol
    All three factors must be present
21
Q

Default rules amongst partners:

A
  • partners are equal
  • every partner can manage
  • no remuneration for managing
  • unanimous consent for new partners
  • no expulsion of partners
  • death or insolvency dissolves the PP
22
Q

Rules regarding dealings between the partners and others:

A
  • every partner is an agent of the partnership
  • every partner is jointly and severally liable for the debts of the partnership
    Partnership is a form of business organization based on agency
23
Q

Limited liability partnership

A
  • innocent partners are not personally responsible for the negligence of another partner (applies only to lawyers and accountants)
24
Q

Limited partnership

A
  • consist of a general partner and one or more limited partners
  • limited partners enjoy limited liability provided they do not participate in managing the partnership business (silent partners)
25
Q

Three ways an entrepreneur can carry out their business

A

a) sole proprietorship, in which the individual carries on business in their own legal capacity
b) partnership, which is the relationship which exists between two or more persons carrying on business together with a view to profit
c) incorporation, which the establishment of an artificial legal entity to conduct the business, having a separate existence from its owners

26
Q

Sole proprietorship

A
  • the simplest form of business organization
  • main advantages: low cost and simple
  • the sole proprietor and the business itself are legally the same
  • the sole proprietorship is not a separate legal entity
  • the sole proprietor has complete control and decision making authority
  • disadvantage: the sole proprietor is personally responsible for all of the debts and liabilities of the business - there is no limited liability with a sole proprietorship like there is with a corporation (the sole proprietor may be sued for personally for the deficit)
27
Q

Corporations

A
  • a separate legal entity
  • for legal purposes, a corporation is a person (legally separate from those who own the corporation)
  • advantage: the limited liability provided to shareholders as a result of the legal existence of the corporation separate an apart from its owners
  • disadvantage: cost and complexity
28
Q

Types of corporations

A
  • business corporation (exists to earn a profit, but don’t always)
  • non-for profit corporations (charitable corporations, ex. Western university)
  • hospitals, universities, cities
  • Crown corporations (owned and operated by the government)
29
Q

Corporation structure

A
  • ex. ABC limited (shareholders own corporation, but they do not manage it)
  • acts through agents
  • officers, often employees, carry out the policy decisions of the directors and manage the business of the corporation on a day to day basis
  • shareholders and corporations are different people
30
Q

What duties do the directors and officers owe to the corporation?

A
  • fiduciary duty
  • duty of care (competence)
  • contractual duty (agency agreement)
31
Q

What duties do the directors and officers owe to the shareholders?

A
  • none
32
Q

Corporations can raise money through:

A
  • debt (borrowing money)
  • equity (issuing shares)
  • debt is a contractual agreement
  • equity is a property relationship (between corporation and shareholders)
33
Q

Features of debt

A
  • debt must be repaid
  • creditors do not get a vote
  • debt may be secured
  • debt may be guaranteed
  • creditors are paid before shareholders (less risk)
34
Q

Features of equity

A
  • no obligation to repay investment
  • shareholders get to vote
  • shareholders share in the profit
  • shareholders are paid after creditors (more risk)
35
Q

Shareholders:

A
  • have no right to sue directors
  • have no right to dividends
  • have no right to be repaid
    But they do:
  • have a right to financial information
  • have a right to vote
36
Q

Ex. Suppose you have a corporation with three equal owners A, B and C. A, B and C are all directors and officers of the corporation. A and B have been approving contracts with D who is ripping them off. What can C do?

A
  • oppression remedy
37
Q

Shareholder remedies:

A
  • winding up order: drastic, only used in limited circumstances
  • derivative action: C can go to the court and get permission to launch an action against A and B on behalf of the corporation, this would not provide C any remedies
  • oppression remedy: show Court a shareholder is being treated oppressively or unfairly, the court can then do anything, such as have A and B buy C’s shares
  • dissent and appraisal right: when a corporation undertakes a fundamental change, a shareholder can dissent, triggering an appraisal, then shareholders must repurchase that person’s shares
  • shareholders agreement: private company
38
Q

Advantages of corporations:

A
  • limited liability (shareholders may lose their shares, but cannot be held liable for debts of corporation beyond that)
  • perpetual existence
  • ability to raise capital
  • succession/transfer
  • formality
  • income tax
39
Q

Disadvantages of corporations:

A
  • cost
  • complexity
  • formality
40
Q

Corporation form alternatives

A
  • co-operative (MEC)
  • L3C (low profit limited liability corporation, must be achieving other social benefits)
  • benefit corporation
  • flexible purpose corporation
  • social purpose corporation
41
Q

Agency relationships are common in many professional areas such as:

A
  • employment
  • Financial advice
  • contract negotiation and promotion
42
Q

Corporate governance

A
  • is a system of rules, policies, and practices that dictate how a company’s board of directors manages and overseas the operations of a company
  • Includes principles of transparency, accountability in security

law 2101 Term 2 (10 decks)

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