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					CHAPTER 26
SOLE PROPRIETORSHIPS
AND PARTNERSHIPS
BUSINESS 4000
CHAPTER 26     SOLE PROPRIETORSHIPS AND
                         PARTNERSHIPS
Sole Proprietorships

 Anunincorporated business owned by a
 single individual

 Noformalities are necessary to create a sole
 proprietorship

 But subject to the same regulations applying
 to all forms of business
        licenses or registration
        human rights legislation

        health and safety regulations

        keeping proper accounts for tax purposes
BUSINESS 4000
CHAPTER 26                   SOLE PROPRIETORSHIPS AND
                                       PARTNERSHIPS
Partnerships

   The relation that exists between persons carrying on
    business in common with a view to make a profit

   Historically, the most common form of business (until
    corporations became available in the 1800’s)

   In 1890, the British Parliament passed the Partnership
    Act, codifying a virtually complete body of well-settled
    rules governing partnerships

   All common law provinces of Canada have adopted this Act
    in substantially the same form in their own partnership
    legislation
       The Partnership Act of Nfld. & Lab.
       See course outline for website address
BUSINESS 4000
CHAPTER 26                 SOLE PROPRIETORSHIPS AND
                                     PARTNERSHIPS
The Nature of Partnership

 Byworking together, persons may pool their
 knowledge, skills, physical assets and money

 Butdisagreements between partners may
 cause delays and inefficiency.

 Dishonesty or incompetence on the part of
 one partner may cause losses to be suffered
 by the others
          Partners are liable for the other partners’ acts.
BUSINESS 4000
CHAPTER 26           SOLE PROPRIETORSHIPS AND
                               PARTNERSHIPS
 Partnership     is a consensual relationship
       But people may be found to be partners even
        though there was no written agreement, and
        sometimes even where they have not consciously
        agreed to be partners!

 Courtswill look to the substance of the
 arrangement, not at what the parties
 themselves call their arrangement

    definition of “partnership” in s. 2(c) of
 See
 Partnership Act (NL)
BUSINESS 4000
CHAPTER 26                 SOLE PROPRIETORSHIPS AND
                                     PARTNERSHIPS
The Business Nature of Partnerships

   Partners must be “carrying on a business”

   Associations such as charitable enterprises, joint
    estate trustees and public boards will not
    constitute partnerships

   Isolated or intermittent transactions may not be
    sufficient to qualify as “carrying on business”
          Owning property and collecting rent together may not
           amount to a business partnership
BUSINESS 4000
CHAPTER 26            SOLE PROPRIETORSHIPS AND
                                PARTNERSHIPS
The Profit Motive

   The sharing of profits is an essential element of
    partnership

   Generally, the sharing of gross receipts does not
    create a partnership

   Section 3 specifically says that certain
    relationships or arrangements will not, of
    themselves, mean that a partnership exists:
BUSINESS 4000
CHAPTER 26               SOLE PROPRIETORSHIPS AND
                                   PARTNERSHIPS
   Joint interests in property

   Sharing of gross returns

   But even the sharing of profits may not point to
    partnership where it is part of an arrangement to:
      Repay a debt owed
      Pay an employee or agent as part of his remuneration
      Pay an annuity to dependant of a deceased partner
      Repay a loan where the lender is to receive a rate of
       interest varying with the profits
      Pay the seller of a business an amount for goodwill
       varying with the profits
BUSINESS 4000
CHAPTER 26              SOLE PROPRIETORSHIPS AND
                                  PARTNERSHIPS

   The following are considered to be strong
    evidence of partnership:

       Profit sharing according to the ratio of each
        partner’s capital contribution

       The receipt of profits by a person who has taken
        part in the management of the business
BUSINESS 4000
CHAPTER 26             SOLE PROPRIETORSHIPS AND
                                 PARTNERSHIPS

The Legal Nature of Partnership

A partnership represents the collective
 rights and duties of all the partners
        It does not, strictly speaking, have its own legal
         existence, independent from the partners


 Butin practice, there is a separate
 existence of the partnership
        As in accounting matters, where the business
         partnership is treated as a separate entity with
         its own assets, liabilities and financial
         statements
BUSINESS 4000
CHAPTER 26          SOLE PROPRIETORSHIPS AND
                              PARTNERSHIPS
 The   Partnership Act recognizes:

     The concept of the “firm” as what the
      partners are referred to collectively (s. 5)

     Partners may agree the firm will continue
      between surviving or remaining partners
      in the event one of them should die or
      become insolvent (s. 33)

     A partnership may have property that is
      distinct from the property of the individual
      partners (s. 21)
BUSINESS 4000
CHAPTER 26      SOLE PROPRIETORSHIPS AND
                          PARTNERSHIPS


 Forthe purposes of court action, a
 partnership may be treated as a distinct
 entity

 Wise to sue in the name of the firm rather
 than naming all the partners individually
 as plaintiffs
BUSINESS 4000
CHAPTER 26                 SOLE PROPRIETORSHIPS AND
                                     PARTNERSHIPS
The Creation of a Partnership
   A partnership agreement creates the partnership

   It can be oral or in writing
          the Statute of Frauds would only require that it be
           in writing where it extends beyond one year and
           performance has not yet begun

          But in practice, only very foolish people would fail to
           put their partnership agreement in writing

   the Partnership Act sets out a number of
    implied terms that will automatically govern the
    partnership, unless the partners explicitly agree
    not to be bound by those terms.
BUSINESS 4000
CHAPTER 26                SOLE PROPRIETORSHIPS AND
                                    PARTNERSHIPS

   A partnership agreement should set out the
    terms of partnership as clearly as possible,
    including:
       Who the partners are (duh)
       The name of the firm
       The nature of the business;
       The responsibilities, capital contributions and share of
        profit/losses of each partner;
       The time and energy each is to devote to the business;
       The procedures for settling disputes; and,
       The method for termination

       See the full Checklist for the contents of a partnership
        agreement, pg. 586
BUSINESS 4000
CHAPTER 26            SOLE PROPRIETORSHIPS AND
                                PARTNERSHIPS

The Liability of a Partner

   General Rule: a partner is personally responsible
    for the debts and liabilities of the partnership

   Liability generally occurs in:

        1. Contract
        2. Tort (and breach of trust)
BUSINESS 4000
CHAPTER 26                  SOLE PROPRIETORSHIPS AND
                                      PARTNERSHIPS
1. Contractual Liability

   The principles of agency and apparent
    authority apply to partners
     Acts done by a partner within the scope of his apparent
      authority bind the firm and all his partners
     (Unless the partner was restricted from those acts by the
      partnership agreement AND the third party knew that)


   Each partner is jointly liable, together with the
    other partners, for the full amount of the firm’s
    debts
       When all the $ of the business is gone, creditors look to the
        individual partners to pony up the rest.
BUSINESS 4000
CHAPTER 26               SOLE PROPRIETORSHIPS AND
                                   PARTNERSHIPS
1. Contractual Liability (cont)

   A person who retires or leaves the partnership
    does not escape liability for debts/obligations
    incurred while he was a partner.

       The only way he can escape liability is through
        novation, i.e. agreement with the remaining partners
        AND the creditors who are owed the debt.
       Very unlikely that creditors will release anyone from
        the debt.
BUSINESS 4000
CHAPTER 26             SOLE PROPRIETORSHIPS AND
                                 PARTNERSHIPS
2. Liability in Tort (and breach of trust)

   The firm and the individual partners are also
    liable for tortious conduct of one of the partners,
    as long as the person was acting within the
    course of the firm’s business.

    Examples:
     Negligent misrepresentations made to customers
     Defamatory statements made about a competing
      company
     Injury arising from a motor vehicle accident (as long
      as the partner was driving while on firm business)
BUSINESS 4000
CHAPTER 26               SOLE PROPRIETORSHIPS AND
                                   PARTNERSHIPS
2. Liability in Tort (and breach of trust) (cont.)

   The firm is also liable for breach of fiduciary duty
    committed by one of its partners

       Think of an accounting firm or law firm - a fiduciary
        to its client. If one accountant/lawyer uses the
        client’s information or money for personal gain, she
        has breached her personal fiduciary duty AND the
        firm’s duty. The firm and its partners will be liable.
BUSINESS 4000
CHAPTER 26                SOLE PROPRIETORSHIPS AND
                                    PARTNERSHIPS
Relation of Partners to One Another

   The partnership relationship is governed by what
    the partnership agreement says. They can
    structure the “rules” for their partnership any
    way they want.

   However, where the agreement is silent about
    particular matters – that is, they haven’t
    addressed it in the agreement – the Act says
    certain rules will be implied
        Have an understanding of the Implied Terms of a
         partnership agreement, and the Fiduciary Duties of
         partners to one another (pp. 591 – 595)
        (What follows is a brief overview for better understanding)
BUSINESS 4000
CHAPTER 26               SOLE PROPRIETORSHIPS AND
                                   PARTNERSHIPS
   Unless varied by the partnership agreement, the
    Partnership Act sets out the following terms:

       Property and rights and interests in property
        brought into the partnership or subsequently
        acquired by it constitutes “partnership property”
        and are to be held and applied exclusively for the
        purposes of the partnership (s. 21).

       Property bought with firm money is deemed to have
        been bought by the firm (s. 22).

       Partners must share equally in the capital and
        profits and must contribute equally to losses (s. 24
        (a)).
BUSINESS 4000
CHAPTER 26            SOLE PROPRIETORSHIPS AND
                                PARTNERSHIPS
     The firm must indemnify a partner for expenses or
      liabilities incurred by her in conducting the
      business of the firm (s. 24 (b)).

     A partner is not entitled to receive interest on his
      capital contribution to the firm but is entitled to
      interest at the rate of 6% on amounts in addition to
      his required contribution (s. 24 (d) and (c)).

     A partner is not an employee and is not entitled to
      remuneration (s. 24 (f)).

     Every partner may take part in the management of
      the partnership business (s. 24 e)).
BUSINESS 4000
CHAPTER 26            SOLE PROPRIETORSHIPS AND
                                PARTNERSHIPS
     A difference arising as to “ordinary matters” may
      be settled by a majority of the partners but
      unanimity is required for a “change in the nature of
      the partnership business” (s. 24 (h)).

     All partners may have access to and copy the
      partnership books (s. 24 (i)).

     The introduction of a new partner requires the
      unanimous consent of the existing partners (s. 24
      (g)).
BUSINESS 4000
CHAPTER 26              SOLE PROPRIETORSHIPS AND
                                  PARTNERSHIPS
   There are certain other provisions of the
    Partnership Act which are not subject to a
    contrary agreement. In other words, the partners
    may not contract out of these duties and
    obligations:

       Partners are bound to make true accounts and full
        information of things affecting the partnership to a
        partner or his or her legal representative (s. 28).

       Partners must account to the firm for any benefit
        derived without the consent of the other partners
        from a partnership transaction or from the use of
        partnership property (s. 29 (1)).
BUSINESS 4000
CHAPTER 26            SOLE PROPRIETORSHIPS AND
                                PARTNERSHIPS
     A partner must not compete with the firm without the
      consent of the other partners and must account for
      and turn over the profits earned in such business to
      the firm (s. 30).
BUSINESS 4000
CHAPTER 26                   SOLE PROPRIETORSHIPS AND
                                       PARTNERSHIPS
Termination of Partnership

   The partnership agreement normally sets out
    provisions for termination

   If it does not, the Partnership Act sets out the
    rules:

    Termination occurs:
      Upon the expiry of the agreed-upon term of the
       partnership
      By giving notice to all the other partners
      Upon the death or insolvency of any partner!
          This is why it is essential that the Agreement contains the
           method for termination
BUSINESS 4000
CHAPTER 26                SOLE PROPRIETORSHIPS AND
                                    PARTNERSHIPS

Termination of Partnership

   The Act also permits the partnership to be
    dissolved by a court order in certain
    circumstances:

        Where a partner is found to be mentally incompetent;
        Where a partner becomes permanently incapacitated;

        Where a partner is guilty of conduct likely to prejudicially
         affect the business;
        Where a partner breaches the agreement or it is otherwise
         not reasonably practicable for the others to carry on
         business with him;
        Where the business can only be carried on at a loss; or,

        Where it is just and equitable to dissolve the partnership.
BUSINESS 4000
CHAPTER 26                  SOLE PROPRIETORSHIPS AND
                                      PARTNERSHIPS
Limited Partnerships
   Different from regular partnerships because some
    partners have limited liability.

   There must be one or more General Partners.
     General Partners have unlimited liability, the same as
      partners in a normal partnership
     There are also Limited Partners – their liability is limited
      to the amount of their initial “buy in” to the limited
      partnership. They stand to lose only what they put in (can
      have no personal liability)

   A Limited Partner is prohibited from taking an active
    role in the management of the partnership.
       If she does, she loses her limited liability status
BUSINESS 4000
CHAPTER 26            SOLE PROPRIETORSHIPS AND
                                PARTNERSHIPS
Limited Liability Partnerships (LLPs)

   Not to be confused with Limited Partnerships

   Mostly relevant for large accounting and law
    firms

   A partner in an LLP is not liable for the debts,
    liabilities or obligations of the partnership or any
    of the other individual partners which are caused
    by the negligence of another partner.

   An LLP must register its firm name and the
    name must contain the words “limited liability
    partnership” or “LLP”
BUSINESS 4000
CHAPTER 26                 SOLE PROPRIETORSHIPS AND
                                     PARTNERSHIPS
Joint Ventures
   A business venture undertaken by two or more
    parties
       They each contribute resources for a specific project

   A contractual joint venture is one effected by
    agreement, without the creation of a separate legal
    entity.

   An equity joint venture is a corporation formed, and
    jointly owned, by the joint venture partners, the
    purpose of which is to carry on the venture.

   Co-venturers are in a fiduciary relationship with each
    other, much like partners. In fact, the joint venture
    may constitute a partnership depending on its
    substance.

				
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