COMM 393: Proprietorships and Partnerships

different types of partnerships

- general partnerships - limited partnerships - limited liability partnerships

Registration

- Limited partnerships (LPs) & Limited Liability Partnerships (LLPs) are required to 'register'. - even general partnerships have to file declaration with basic partnership information (ex. name, address of each partner, & name of partnership) (in BC this is only for partnerships engaged in trading, manufacturing, or mining). - declarations must be filed when change in membership or when firm is dissolved. - if they do not register, partnership still exists, but they are required to give creditors and the public information about the partnership.

joint ventures

- agreement b/w 2(+) parties (usually corporations) to collaborate on a specific project and to contribute their assets and split the profits. - not for continuing activities - no fiduciary duties - must be careful not to inadvertently constitute a partnership - no liability as a 'partner' - a contractual relationship: can be incorporated (an 'equity joint venture') or unincorporated.

Limited Partnerships (LP)

- allows partnership to carry on without exposing limited partners to personal liability: the general partner has unlimited liability while a limited partner has liability limited to the amount paid by them as a capital contribution. - limited partners cannot take active part in management of partnership - if active part in management, they become general partner (with the attached liability) - used to limit certain partners liability - partnership managed by one or more general partners who have no limit on liability for the acts & debts of partnership. - must be registered, expressly formed. - can contribute $ or property - can inspect books - CANT provide services or take active role in management without losing benefit of limitation on their liability. - used mainly as tax shelters.

Levels of partners

- apparent partners - new partners (not liable for partnership debts incurred prior to joining firm) - retiring partners (liable for debs incurred while a partner) (concern regarding apparent authority)

Liability of Partners

- each partner is the principal & agent of the other. - unless outside apparent authority or 3rd party aware of limits - under a general partnership, each partner is personally liable for the debts & liabilities of the partnership. - each partner is liable for debts of partnership to the full extend of their assets. - every partner is jointly liable for the debts & obligations of the firm (personally liable for the full amount of the firm's debts) - creditors (a person or company to whom money is owed) can look to personal assets of partner if assets of partnership are exhausted. - one partner can look to his other partners for indemnification (compensation for harm or loss) for their respective portions if he goes ahead and pays the whole thing.

Advantages of sole proprietorship

- ease of formation & termination: as soon as individual starts doing business they have a sole proprietorship. - low start-up costs - no legal requirements other than licences required to do business and registration of name is required (in BC you must register the name if operating under a name OTHER than your own). - ALL profits belong to owner - pay taxes as an individual (income is reported as personal income) - you are your own boss, ownership flexibility - responsible for payroll deductions for tax, employment insurance (EI) & Canadian Pension Plan (CPP)

Partnership Act

- implies terms into partnership agreements when the parties have not addressed the issues in question. - unless specified otherwise, partners are equals: equal say in management, equal share of profits & losses, equal distribution of capital. - partnership agreements only allow partners to vary terms that govern their relationship with each other. - may not vary terms that govern responsibility to third parties. - are fiduciaries, must act in good faith.

sole proprietorship

- oldest & simplest form of doing business

apparent partners

- partner is only liable for obligations of the partnership while they are a partner - only way out of that liability is novation (where partners and creditors agree to release from liability) - if a person gives the appearance that they are a partner, they are on the hook for liability as a partner - to make sure a retiring lawyer ceases their liability on retirement, generally they: a) publish a notice on the gazette (journal/newspaper) b) send a note to clients & persons dealing with the firm.

Partnership Assets

- partner's share of partnership assets are available to personal creditors. - partnership can own property distinct from its partners BUT partners will have a personal interest in that property. (ie. they each own a certain percentage according to their partnership interest). - partnership creditors have first call against partnership assets before personal creditors of an individual partner. waterfall: pay out creditors of a partnership & then distribute remainder to individual partners (who then pay out their creditors). - this works both ways, where if a partner goes bankrupt, their personal creditors are paid out of their personal estate BEFORE they can take anything from the partnership.

Partnership Agreement

- partnership comes into existence through agreement (express or implied) - purpose of agreement is to set out the entire terms of the relationship includes: - identity of partners - name of partnership - nature of business to be carried on - duration of partnership - method of terminating partnership - rules for bringing new partners - what happens on death or retirement of existing partner - management & participation in management by partners - capital contribution of each partner - sharing of profits & losses - dispute resolution process

"in common"

- partnership is consensual ( relating to or involving consent or consensus) and contractual relationship. - normally it is a written agreement, however, can still exist even if not written or oral but is inferred from the conduct of the parties (ie: that they are acting in common) - courts will look to the 'substance' of the relationship to determine if acting in common.

torts

- responsible for torts of partners while acting within apparent authority of the business of the firm. - firm and partners are liable for any wrongful act or omission of any partner acting in the ordinary course of the business of the firm. (ex. defamation (he action of damaging the good reputation of someone) or negligence on the part of a lawyer) - trust accounts & the handling of funds is deemed o be in the ordinary course of business.

"with a view to profit"

- sharing profits is essential - sharing of gross receipts alone will not create a partnership (ex. royalty contracts, etc) has to have something more, usually the person receiving the profits has contributed property or money to the business and usually capital contribution has some correlation with profit-sharing = must have a profit motive.

Different types of business organizations:

- sole proprietorships - partnerships - corporations - joint ventures

Partnership

- the relationship which subsists between persons carrying on business in common with a view to profit. - can be 2(+) persons (a corporation is known as a person) - does not have a separate legal identity from the partners who make up the partnership = partners ARE the partnership & are usually liable for the debts & actions of the partnership. - may be treated as a separate entity (may bring an action in the name of a firm without naming all the partners as plaintiffs and an outside party may sue a partnership in this firm name without naming all partners as defendants)

Partnership Agreements

- to the extend it is not spoken to, it defaults to what is provided under the Partnership Act - each partner should have their own legal counsel (interests are not consistent with other parties necessarily) - so long as not illegal or contrary to public policy, any type of term is okay - can be oral but better to have a written record for certainty of terms - dissolving partnership is easy.

Disadvantages of Sole Proprietorship

- unlimited liability (personal & vicarious liability) - financing limitations - lack of continuity - even if you use 'Ltd', 'Inc', or 'company' in your name and you are NOT incorporated, you are still a sole proprietor and are personally liable.

Limited Liability Partnerships (LLP)

- used mainly by accounting & law firms - partners are not liable for debts, liabilities, or obligations of partnership or any negligent acts of other partners. - partners remain liable for OWN negligent acts or omissions and for those under their direct supervision or control. - must have written agreement that designates the partnership as LLP - LLPs may only carry on business as "eligible professions", where the statute must expressly permit an LLP to practice that profession and the governing body requires that the partnership maintain a minimum amount of liability insurance. -different from LP: no general partner requirement (with unlimited liability), CAN participate in management (unlike LP), ONLY available in certain professions. - LLP at the end of the name - formed expressly, must be registered. - only available in certain provinces. - used only for specific purposes, such as formation of professional partnership. - partner in LLP is not liable for debts, liabilities, or obligations of the partnership or any partner arising from the negligent acts or omissions that another partner or an employee, agent or representative of the partnership commits in the course of the partnership business while the partnership is a limited liability partnership.

"carrying on business"

- will not include societies or other associations where there is a charitable purpose or non-commercial purpose. -"business" may not necessarily be carried on with a view to profit. - isolated business transactions where parties are acting with a shared interest are not necessarily partnerships.

"Persons"

can be individuals OR corporations.

contractual liability

each partner is an agent of the firm and his other partners for the purpose of the business of the partnership and the acts of every partner who does any act for carrying on the usual way of business of the kind carried on by the firm of which he is a member bind the firm and its partners. -SO: unless the authority of a partner has been restricted by the partnership agreement and a 3rd party dealing with the partner KNOWS THIS, any act done by the partner within their APPARENT authority (relied on by the third party) will BIND all partners.

creation of a partnership:

may be: a) express - where 2(+) parties agree either in writing or orally to carry on business as a partnership - may require registration in certain provinces b) implied -courts will deem a partnership - look at substance rather than form of relationship - s.2 met, management role, share profit, contribute to capital.

apparent authority

the authority that a third party is entitled to assume that the agent possesses