Forms of Business Ownership

Question 1

Law of agency

Relationships law of agency regulates (3)

Answer 1

Law of agency deals with contractual or non contractual fiduciary relationships involving an agent authorized to act on behalf of the principal to create legal relations with a third party
Regulates relationships between
- agent and principal
- agent and third party
- principal and third party
Relies on good faith representation
Usually created by contract

Question 2

Types of agents (3)

Answer 2

Universal = hold broad authority to act on behalf of principal
General = more limited authority to conduct certain transactions over time
Special = authorized to conduct single transaction of a specified series over a limited time

Question 3

Actual authority

Answer 3

Can be expressly conferred or implied, authority arises by consensual agreement
If agent acts outside of their authority, they may breach contract or be liable to third party for breach of implied warranty of authority
Implied/usual = authority can be inferred by virtue of the agent’s position when it is reasonably necessary for them to carry out express authority
- can be customary (customs of trade imply authority) or incidental (authority is necessary for completing primary express authority)

Question 4

Apparent/ostensible authority

Answer 4

Principal’s words/conduct would lead reasonable third party to believe that agent had authority, even if principal and agent never discussed such relationship
Doctrine of holding out/agency by estoppel = principal will be stopped from denying grant of authority if third parties have changed their positions to their detriment based on representations made

Question 5

Ratification

Answer 5

Even if agent acts outside of their authority, principal can still choose to ratify agreement between agent and third party
Ratification can occur by conduct/inaction

Question 6

Rama Corp Ltd v Proved Tin & General Investments Ltd

Answer 6

About: agency by estoppel
To use this defense, you must have
- a representation
- reliance on the representation
- alteration of your position resulting from such a reliance

Question 7

Watteau v Fenwick (UK)

Answer 7

About: representation of authority
Third party can hold liable a principal whose agent interacted with the third party outside their authority and the principal’s knowledge
Principal is liable for all acts of the agent which are within the authority usually confided to an agent of that character
Heavily criticized decision
Implied actual authority due to nature of agent’s position

Question 8

Agent’s liability to third party

Answer 8

If agent has actual or apparent authority, agent will not be liable by third party for acts performed within scope of authority as long as agency relationship and identity of principal have been disclosed to the third party
If identity is unknown, then agent has no apparent authority to third party
If agency is unknown, the contractual relationship is between agent and third party
When agent has no actual or apparent authority, the agent is liable to third party for breach of implied warranty of authority

Question 9

Agent’s liability to principal

Answer 9

If agent has acted without actual authority but the agent is still bound to agreement because agent had apparent authority to third party, agent is liable to principal for any damage

Question 10

Principal’s liability to agent

Answer 10

If agent has acted within scope of actual authority, principal must provide protection for agent for payments made while completing principal’s business
Vicarious liability: principals are liable for their employees and agents acting within their scope of duties

Question 11

Duties of the agent (3)

Answer 11

Fiduciary duty = agent must prioritize principal’s interests, must undertake tasks specified by agency and discharge their duties with care and due diligence
- agent must not accept new obligations inconsistent with duties to principal, and cannot represent conflicting interests of more than one principal without consent of principal
- agent must not usurp an opportunity from the principal (for themselves or another party)
Duty of care = to act reasonably
Contractual duty = to honour agency contract

Question 12

Duties of principal

Answer 12

Contractual duty = to honour agency contract

Make full disclosure of info relevant to transactions agent is authorized to make

Question 13

How agency relationship can be terminated (4)

Answer 13

Dissolved by agreement such as
- withdrawal by agent (however, principal can’t revoke agency when agent has interest in subject of agency, to the prejudice of such interest, until debts are satisfied)
- agent renounces business of agency
- by discharge of contractual agency obligations
Operation of law
- death, insanity of bankruptcy of either party

Question 14

Rules for agency termination (3)

Answer 14

Principal can’t revoke agent’s authority after it has been partly discharged
If agency if for fixed period, principal can’t terminate agency early without sufficient cause, principal must give reasonable notice and may be liable to compensate agent for losses
- agent abides by same terms for early termination of fixed term agency
Termination doesn’t take effect until agent is notified, and doesn’t take effect to third parties until they have been notified

Question 15

Examples of agency relationships (4)

Answer 15

Employment
Financial advice
Contract negotiation
Real estate

Question 16

Sole proprietorship

Answer 16

Pros: low set up cost, very simple as proprietor and business are one entity
Cons: proprietor has unlimited liability for business’ debts
Business income is personal profit or loss incurred, expenses are only deductible if they are incurred with reasonable expectation of earning a profit

Question 17

Partnership

Answer 17

Pros: Low set up cost, simple, access to more resources, shared burden
Cons: unlimited liability, partner can legally bind other partners, conflict, lower individual profit

Question 18

Types of partnerships (2)

Answer 18

Limited = one general partner + several limited partners
- limited partners have limited liability but don’t participate in management, used to attract investors and for income tax benefits
Limited liability partnership = used by lawyers and accounts who aren’t allowed to incorporate to reduce liability, allows innocent partner to avoid liability for negligence of fellow partner

Question 19

Partnerships act
Factors in whether a partnership exists (3)
Default rules among partners (8)

Answer 19

Act defines partnership as the relation that subsists between 2 or more persons carrying out business together for profit
Factors: sharing of profit, sharing of decision making, sharing of capital
Rules (unless modified by agreement)
- all partners are equal
- all partners may manage
- no remunerations for managing
- new partners need unanimous consent
- no partner expulsion
- death of insolvency of one partner dissolves entire partnership
- every partner is agent of partnership
- every partner is jointly and severally liable for debts of partnership

Question 20

Corporation

Answer 20

Is artificial legal entity that has all rights of a natural person when carrying out business, legally separate from its owners
Pros: limited liability, perpetual existence, ability to raise capital, rights of a natural person, succession/transfer, formal, income tax benefits
Cons: high set up cost, complex, formal
Comes into existence when articles of incorporation are filed
Corporation is taxes separately from shareholders

Question 21

Agents of corporation

Duties of agents (3)

Answer 21

Shareholders elect directors to oversee business management who then appoint officers, directors and officers are agents of corporation
Duties
- fiduciary duty
- duty of care
- contractual duty
Agents have no duty to shareholders, only to corporation

Question 22

Types of not for business corporations (3)

Answer 22

Not for profit
Hospitals/universities/cities
Crown corporations

Question 23

Features of debt financing

Answer 23

Must be repaid
Creditors don't get vote
Debt may be secured and guaranteed
Creditors are paid before shareholders
Contractual relatinoship

Question 24

Features of equity financing

Answer 24

No obligation to repay investment since it’s a property relationship
Shareholders get to vote
Shareholders share in profit
Shareholders paid after creditors

Question 25

Canadian securities regulation

Answer 25

Public companies must disclose all financial statements to public so people can make informed investment decisions
Based on disclosure rather than regulation
- puts costs on corporations instead of government
- encourages participation in corporate governance
- logistically simpler

Question 26

Shareholder rights

Answer 26

Have right to receive financial info about corporation and to vote
No right to sue directors, be paid dividends, or be repaid

Question 27

Remedies for shareholders (5)

Answer 27

Winding up orders to dissolve corporation
Ask court for derivative action (shareholder can act as corporation to bring action against other shareholders)
Ask court for oppression remedy
Dissent and appraisal right (if there is fundamental change found through appraisal, corporation must buy share back at fair value)
Shareholders agreement

Question 28

Alternate corporate forms (5)

Answer 28

Allows corporations to earn low profit and act in social interests
Co-operative
Low profit limited liability corporation
Benefit corporation
Flexible purpose corporation
Social purpose corporation