Week 7: (Forms of Business Organizations Flashcards
What is the Criteria of a Partnership
- A relationship must be consenual and contractual
- Must be 2 or more people
- Must share in the business profits
- Business is carried on in common (active business)
Is a written agreement necessary to show a partnership relationship exists
No. Court looks at SUBSTANCE
What is several liability and contractual liability
Several Liability: Parties in partnership are only liable for their own part
Contractual Liability: Partnership is responsible for what is expected of them (even tho only 1 person signing a bank loan)
What is the Apparent Authority Principle and apparent partners
Apparent Authroity Principle: When someone seems like they’re allowed to act on behalf of someone else, even if they’re not explicitly given permission
Apparent Partners: Someone acts like partners even though they are not (still liable to any person they gave credit to)
What are the 3 types of partnerships and explain them
1.Limited Liability Partnership
-A LLP is a partnership where a non-negligent partner is not LIABLE for another partners negligence
-Limites the personal liability of non-negligent partners
-ONLY APPLIES TO Accountants/Lawyers
- Limited Partnerships
-A Limited partnership is where 1 partner has limited liability (only liable for the inital investment)
-Limited Partner CANNOT be involved in management - General Partnerships (joint liability)
-Each partner is personally liable for the full amount of firms debts
-could look at personal assets of each
How to terminate a partnership
Must have express provision (something clearly stated) in the agreement
If not there is termination through death, or expiration OR if one of the partners cannot carry on business if they are (mentally incompetent, breaches impratical, guilty)
What are some characteristics of a corporation
-A corporations is liable for its own debts
-Shareholders are NOT liable unless they lift the veil in private corp and make the corp breach contract (shareholder can be sued)
-seperates ownership vs management
-shareholder owes no duty of good faith to corp
-taxable entity
what is articles of incorporation and why does a corp need it
Articles of Incorporation is a birth certificate outlining all important information of the corp
-states what shareholders are entitled to
-2/3 of shareholders must approve of a change
What are the 4 types of corporations
1.Public
2.Private
3.Corporate Groups (a group of many corps public/private)
4.Cooperatives (incorporated entity owned and operated by members)
What are the basic elements of the partnership relationship?
The four basic elements of a partnership relationship are set out in section 2 of the Partnerships Act (Ontario) at p. 100 of Course Kit:
(i) a “relationship” – consensual/ contractual (written or oral), courts look at substance of relationship, regardless of what parties may call it;
(ii) “between two or more persons” – including corporations;
(iii) “carrying on business in common” – does not include charitable enterprises or joint trustees of estate; term “business” is defined to include every trade, occupation and profession, but does not include every activity carried on for profit
(iv) “with view to profit” – sharing of profits is an essential element of a partnership (eg. “sharing of costs” re two merchants pooling delivery order to reduce “shipping charges” does not qualify as sharing of profits)
What does it mean to say “every partner is an agent of the firm”?
The phrase “every partner is an agent of firm” means that, for the purpose of the business of a partnership, the conduct of any partner acting on behalf of the partnership in the ordinary course of the partnership’s business will bind firm and its partners UNLESS (i) the authority of partner has been restricted by agreement with the other partners, and (ii) a 3rd party knows of this restriction
What is a limited liability partnership? How does it differ from a limited partnership?
A limited liability partnership is a partnership where every partner remains liable for his/her own negligent acts/ omissions and those of others under that partner’s “direct supervision and control”; the firm itself remains liable BUT the injured person may not look beyond assets of firm to the assets of individual non-negligent partners for recovery; this is DIFFERENT THAN a limited partnership where the injured person may look beyond assets of firm to the assets of all individual (or corporate) general partners, but the liability of all limited partners (i.e., “silent” partners who do not actively engage in the management of the limited partnership) is limited to the extent of their capital contribution to the firm; the protection of non-negligent partners in LLP’s applies only to negligent acts or omissions of another partner (the protection does not apply to other types of tortuous conduct, such as defamation, or to contractual liability)
What are the main differences between partnerships and corporations?
The principal differences between partnerships and corporations are:
- partnerships don’t have “separate legal personalities”, while corporations do
- partner / owners of a general partnership are “personally liable” for the partnership’s misconduct, whereas shareholders of a corporation are not
- partnership “ownership” is generally not transferable, whereas corporate ownership can be transferable
- owners of general partnerships participate in the management of the partnership, while this is not necessarily so in a corporation
- the death or bankruptcy of a partner dissolves a partnership (subject to contrary provisions in the partnership agreement), while a corporation is a separate “legal person” and can remain in existence for perpetuity
What factors influence an investor’s choice between shares and bonds?
An investor’s “risk tolerance” is a key factor influencing his/her choice between shares and bonds. Bonds provide (i) a fixed investment, (ii) guaranteed return (provided corporation remains “solvent”) in form of regular interest payments, and (iii) the right to be redeemed in full at “maturity date”. Common shares carry no guarantee that their holders will receive anything (either by way of “dividend” or “upon dissolution”), BUT common shareholders participate in “capital growth” of corporation. Preferred shares fit somewhere in between.
Pliable Plastics Inc. issued 50 000 common shares at $100 each. Some years later, in order to raise additional capital, it issued 20 000 Class “A” preferred shares, also at $100 each. The preferred shares were stated to have a redemption price of $100 and were entitled to receive a first dividend of $8 per share. The following year, to raise further funds, the corporation made an issue of bonds, in the sum of $2 000 000, secured by a floating charge on all of its assets.
Soon afterward, Pliable Plastics found itself in serious financial difficulties. Although it had substantial assets, these were not readily realizable, and it was unable to pay its debts as they fell due. The directors resolved to sell off the corporation’s assets and to wind up the corporation.
The sale of the assets realized $7 000 000, and, after paying off its creditors (other than the bondholders), the corporation was left with $5 500 000. How much will each common share receive?
– The bondholders are secured creditors and must be paid first, leaving $3,500,000 (i.e., $5,500,000 less $2,000,000) to distributed among the shareholders. The preferred shareholders are entitled to have their shares redeemed before any distribution is made to the common shareholders. They will receive the full redemption price of $100, i.e. in total 20,000 x $100 = $2,000,000. (Note that first dividend of $8 per preferred share would not be declared payable, because the corporation is “unable to pay its debts as they become due” and therefore would not satisfy the “solvency test”.) The remaining $1,500,000 can then be distributed rateably among the common shareholders, w each common shareholder receiving $1,500,000 / 50,000 = $30.
