Forms of Business Ownership Flashcards
Law of agency
Relationships law of agency regulates (3)
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
Types of agents (3)
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
Actual authority
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)
Apparent/ostensible authority
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
Ratification
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
Rama Corp Ltd v Proved Tin & General Investments Ltd
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
Watteau v Fenwick (UK)
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
Agent’s liability to third party
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
Agent’s liability to principal
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
Principal’s liability to agent
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
Duties of the agent (3)
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
Duties of principal
Contractual duty = to honour agency contract
Make full disclosure of info relevant to transactions agent is authorized to make
How agency relationship can be terminated (4)
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
Rules for agency termination (3)
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
Examples of agency relationships (4)
Employment
Financial advice
Contract negotiation
Real estate
Sole proprietorship
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
Partnership
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
Types of partnerships (2)
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
Partnerships act
Factors in whether a partnership exists (3)
Default rules among partners (8)
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
Corporation
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
Agents of corporation
Duties of agents (3)
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
Types of not for business corporations (3)
Not for profit
Hospitals/universities/cities
Crown corporations
Features of debt financing
Must be repaid Creditors don't get vote Debt may be secured and guaranteed Creditors are paid before shareholders Contractual relatinoship
Features of equity financing
No obligation to repay investment since it’s a property relationship
Shareholders get to vote
Shareholders share in profit
Shareholders paid after creditors
Canadian securities regulation
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
Shareholder rights
Have right to receive financial info about corporation and to vote
No right to sue directors, be paid dividends, or be repaid
Remedies for shareholders (5)
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
Alternate corporate forms (5)
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
