Legal forms of business Flashcards
forms of business organization
- Sole proprietorships
- Partnerships (general partnerships, limited partnerships, limited liability partnerships)
- Corporations
when do you ask whether a business should operate as a sole proprietorship, partnership, or corporation?
only when business is small
- Business enterprises with a large number of owners and substantial earnings are almost always incorporated
why is partnership not an “entity”?
Doesn’t have separate existence the way corporation does. Not an object, can’t own a partnership, or historically sue partnership
can you sue a partnership?
historically no, but now in NS you can (but basically suing partners jointly)
Essential features of business corporation
- Corporation is separate legal entity – distinct legal person, separate from owners & managers;
- SH of business corporation enjoy limited liability SH not responsible for debts or obligations issued by a corporation;
- Corporation has perpetual existence, so it does not die when its owners or operators die; and
- the “ownership” or “equity” interest in a corporation can usually be transferred
simplest and widely used form of business enterprise
Sole Proprietorship
- Few formalities involved in establishing or operating such a business
in a sole proprietorship, what is the proprietor responsible for?
Proprietor is responsible both directly and vicariously for those torts committed by employees
- Personal liability is unlimited subject to any possible protection by contractual provisions or insurance
what happens upon death of sole propreitor?
the business ceases
- If business did not depend upon personal efforts of proprietor, someone else might carry on the business
how is income from sole proprietor’s business taxed?
Income from sole proprietor’s business is taxed as income of the proprietor
- taxed at the rates that apply to individuals (different than corporations which have a flat rate rather than progressive rates)
what happens to tax when sole proprietor loses money? how is this different from corporation?
sole proprietor can use those business losses to reduce his or her income from one source, and so reduce the tax bill
- Different from business corporation, because a business corporation is treated as a taxpayer, distinct from its shareholders
what two ways does limited partnership differ from general partnership?
- LP each partner is only liable to the extent of the property contributed or agreed to be contributed by that limited partner to the capital of the firm
- LP is a creature of statute (Unlike GP, existence of LP cannot simply be inferred from the conduct of the parties)
what does limited partnership consist of
one general partnership and 1+ limited partners (s 4(2))
does a general partner in LP have limited liability?
no, General partner doesn’t have limited liability
in general partnership, who can manage the firm? in an LP?
- in GP, all partners can manage the firm
- in LP, mgmt with general partner (s9)
how can a limited partner lose protection of limited liability?
A limited partner can lose the protection of limited liability if they take part in the control of the business (s 17)
What if the limited partners incorporated a corporation to serve as general partner with the limited partners serving as directors and officers – should this be allowed to avoid s 17?
Delaney v Fidelity Lease Ltd (1975) - Limited partners incurred unlimited liability because of their control of the limited partnership through the incorporated general partner
what are partners in Limited Liability Partnership like
Partners are equal (no distinction bw general and limited partners)
- All partners equal participants in firm, and all have management rights as in general partnership – but their liability limited
what is liability like in limited liability partnership?
- Partnership still liable for the wrongs of each partner
- But recovery limited to property of tortfeasor and of partnership not personal property of other partners
- Other partners personal property is not put on the line, except whatever money they put into the partnership
in an LLP, when are partners fully liable?
- Their own wrongs (s 58 of the Partnership Act)
- wrongs committed by their supervisees (s 57(2) of the partnership act)
- wrongs of other partners they had a chance to prevent
what does LLP permit
permits partners in what is otherwise a general partnership to avoid personal liability for the wrongful acts of other partners
If a substantial uninsurable risk is possible what form of business should it be?
If a substantial uninsurable risk is possible, a limited partnership or corporation is preferable to limit the proprietor’s liability to the amount invested
what is income/loss of partnership deemed to be?
Income/loss of partnership is deemed to be the income/loss of the partners themselves
5 basic features of how partnership is supposed to work
- personal in nature
- presumptive equality
- reciprocal agency
- primacy of K
- fiduciary duty
Is there a legal limit on the size of a partnership?
no
- but generally only few people rather than a large number of people because:
- Partnership implies that all partners can create liabilities for you – want to trust the people that you are entering into partnership with
