Legal forms of business

Question 1

forms of business organization

Answer 1

• Sole proprietorships
• Partnerships (general partnerships, limited partnerships, limited liability partnerships)
• Corporations

Question 2

when do you ask whether a business should operate as a sole proprietorship, partnership, or corporation?

Answer 2

only when business is small

- Business enterprises with a large number of owners and substantial earnings are almost always incorporated

Question 3

why is partnership not an “entity”?

Answer 3

Doesn’t have separate existence the way corporation does. Not an object, can’t own a partnership, or historically sue partnership

Question 4

can you sue a partnership?

Answer 4

historically no, but now in NS you can (but basically suing partners jointly)

Question 5

Essential features of business corporation

Answer 5

1. Corporation is separate legal entity – distinct legal person, separate from owners & managers;
2. SH of business corporation enjoy limited liability  SH not responsible for debts or obligations issued by a corporation;
3. Corporation has perpetual existence, so it does not die when its owners or operators die; and
4. the “ownership” or “equity” interest in a corporation can usually be transferred

Question 6

simplest and widely used form of business enterprise

Answer 6

Sole Proprietorship

- Few formalities involved in establishing or operating such a business

Question 7

in a sole proprietorship, what is the proprietor responsible for?

Answer 7

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

Question 8

what happens upon death of sole propreitor?

Answer 8

the business ceases

- If business did not depend upon personal efforts of proprietor, someone else might carry on the business

Question 9

how is income from sole proprietor’s business taxed?

Answer 9

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)

Question 10

what happens to tax when sole proprietor loses money? how is this different from corporation?

Answer 10

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

Question 11

what two ways does limited partnership differ from general partnership?

Answer 11

1. 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
2. LP is a creature of statute (Unlike GP, existence of LP cannot simply be inferred from the conduct of the parties)

Question 12

what does limited partnership consist of

Answer 12

one general partnership and 1+ limited partners (s 4(2))

Question 13

does a general partner in LP have limited liability?

Answer 13

no, General partner doesn’t have limited liability

Question 14

in general partnership, who can manage the firm? in an LP?

Answer 14

• in GP, all partners can manage the firm

- in LP, mgmt with general partner (s9)

Question 15

how can a limited partner lose protection of limited liability?

Answer 15

A limited partner can lose the protection of limited liability if they take part in the control of the business (s 17)

Question 16

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?

Answer 16

Delaney v Fidelity Lease Ltd (1975) - Limited partners incurred unlimited liability because of their control of the limited partnership through the incorporated general partner

Question 17

what are partners in Limited Liability Partnership like

Answer 17

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

Question 18

what is liability like in limited liability partnership?

Answer 18

• 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

Question 19

in an LLP, when are partners fully liable?

Answer 19

• 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

Question 20

what does LLP permit

Answer 20

permits partners in what is otherwise a general partnership to avoid personal liability for the wrongful acts of other partners

Question 21

If a substantial uninsurable risk is possible what form of business should it be?

Answer 21

If a substantial uninsurable risk is possible, a limited partnership or corporation is preferable to limit the proprietor’s liability to the amount invested

Question 22

what is income/loss of partnership deemed to be?

Answer 22

Income/loss of partnership is deemed to be the income/loss of the partners themselves

Question 23

5 basic features of how partnership is supposed to work

Answer 23

1. personal in nature
2. presumptive equality
3. reciprocal agency
4. primacy of K
5. fiduciary duty

Question 24

Is there a legal limit on the size of a partnership?

Answer 24

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