Chpt 24: Types of Business

Question 1

What is one reason a business may not want to incorporate?

Answer 1

Some professions forbid their members to practice as a corporation

Question 2

Is it viable for a single person to incorporate their business? Why or why not?

Answer 2

It is because you only need one shareholder and one director. The fees are only a few hundred dollars.

However, you still have to go through the government.

Question 3

How do you form a sole proprietorship in Canada?

Answer 3

Once you start doing business, you form a sole proprietorship automatically.

Unless you do business in certain fields which may require you to obtain either a municipal or provincial license.

Question 4

What must be taken into consideration when operating a sole proprietorship?

Answer 4

• If you are not operating under the name of the owner, you must register the name
• Charged tax under personal income tax
• Must make employee payroll deductions for income tax, employment insurance and Canadian Pension
• Comply with human rights and health/safety regulations

Question 5

Can a partnership be performed between two corporations?

Answer 5

Yes, partnerships can be formed by two or more persons, that being natural or legal people

Question 6

Do you have to seek government approval to form a partnership?

Answer 6

No, but the Partnership Act governs a lot of the operations of a partnership

Question 7

What is the formal definition of a partnership?

What are the four elements of this definition?

Answer 7

Partnership is the relation which subsists between persons carrying on a business in common with a view of profit.

1) A relationship
2) Between Persons
3) Carrying on a business in common
4) With a view of profit

Question 8

What is considered a relationship between partners?

Answer 8

Usually a consensual and contractual agreement to be partners.

However, if two people have acted as partners without an oral or written contract, the courts may still treat them as such

Question 9

What is not considered a business in the context of forming a partnership?

Answer 9

• Charitable organizations
• Joint trustees of an estate
• Public Boards
• Corporations

Question 10

If Mitch and his teammates come together to purchase and manage a portfolio of securities, is this a partnership?

Answer 10

Nope

Question 11

If Mitch and his teammates buy hockey sticks together to get the buy 10 get 10 free deal, is this a partnership?

Answer 11

Nope

Question 12

What does the “with view of profit” element of a partnership mean?

Answer 12

Splitting profits of a business’s operations is strong evidence supporting the existence of a partnership.

Question 13

When is splitting profits not evidence of a partnership?

Answer 13

• Repaying Debt
• Commission
• Paying family of a deceased partner
• Repaying a loan where interest is a percentage of profits
• Selling a business where goodwill is a proportion of profits

Question 14

Is a partnership its own independent entity? Why or why not?

Answer 14

Legally it is not. A partnership is just a relationship between two or more persons. All assets and liabilities are the responsibility of the partners.

However, in some legal and accounting cases, partnerships can be treated as an independent entity.

Question 15

What is a strategy that can be used to ensure the continuation of a partnership?

Answer 15

The Partnership Act lets, if the partners agree beforehand, for a partnership to continue in the event of someone dying, bankruptcy, or retirement.

There is also the concept of a firm that is recognized by the Partnership Act that allows people to join and leave under the same partnership.

Question 16

Can a partnership own property?

Answer 16

No, the partners each own interest in property

Question 17

Who is prioritized when a partnership and its partners have credit

Answer 17

• The partnership’s creditors have first dibs on the partnership’s assets
• If this is not sufficient, personal creditors of the partners have priority over the partnership’s creditors

Question 18

Can you sue a partnership?

Answer 18

Yeah

Question 19

Why is the partnership agreement important?

Answer 19

It will help resolve both legal disputes and personal disputes

Question 20

Do partners need to register their partnership?

Answer 20

Yes, in most provinces you are required to register essential information about your partnership (name, addresses, firm name etc…)

Declarations are also necessary for the dissolving and change of membership

Question 21

Why is partnership declaration important?

Answer 21

Allows for members of the public to know who is part of a partnership and where to send notices

Question 22

What are partners liable for?

Answer 22

Any action undertaken by a partner that would be considered within the scope of apparent authority relied upon by an outsider makes the entire partnership liable

Question 23

If a firm is sued, who is liable for the debts?

Answer 23

All the partners are liable. If the partnership’s assets are not enough, personal assets of the partners are liable.

Question 24

Willy sues Mitch for $1 000 000. Mitch can only pay $800 000. Willy finds out that Mitch is in a partnership with Austin. Can he claim $200 000 from Austin?

Answer 24

No, he only sued Mitch. If he sued Austin and Mitch then yes.

Question 25

Willy sues Mitch and Austin. Mitch pays all the amount owed. Is Mitch entitled to half of what Austin owed?

Answer 25

Yeah

Question 26

If John joins Mitch and Austin's firm after they owe $1 000 000 to Willy, is he liable for the $1 000 000 too?

Answer 26

Nope, unless there is an agreement otherwise, you are only liable for credits incurred by the partnership after he joins.

Question 27

If Patrick retires, leaving the partnership he was in, is he responsible for any debts from his partnership? What if people think he is still in the partnership?

Answer 27

- No, he is only responsible for credits from before he left - If people loan money to the partnership because they think he is in it, then yeah, Patrick is liable. UNLESS Patrick made it very clear/notified people he was not part of the partnership.

Question 28

Patrick wants to leave the partnership and retire. What can he do to protect himself from future debts?

Answer 28

- Notice existing clients of the partnership - Place notice in the official provincial gazette that he is leaving - Ensure his name is removed from the register - Ensure his name is removed from letterheads

Question 29

What is the firm liable for in a tort?

Answer 29

All actions of partners done in the course of doing business as part of the partnership. Also liable for any fiduciary trust given to the firm.

Question 30

Where can the terms of a partnership be found?

Answer 30

The terms can be either from the Partnership Agreement, inferred based on the conduct of the parties or implied by the Partnership Act

Question 31

What are the consequences of breaking the terms of a partnership

Answer 31

This is similar to breaching a contract and the partner is liable to the damages of other partners

Question 32

What are the implied terms of a contract based on the Partnership Act?

Answer 32

1) Property - Any property brought into the partnership or bought with partnership money is the partnership's property. That means it is held by the partners for the purpose of the partnership in accordance with the agreement 2) Financial Arrangements - Profits split equally, losses contributed equally. Firm must indemnify partners for expenses/liabilities. Interest is not owed for capital contributed. 3) Conduct of Business - Every partner may take part in managing partnership, ordinary business may be decided by majority of partners, no decision should be made without consent of all - All partners can inspect and access books 4) Membership - No new partners unless all current partners accept. Cannot assign his part in partnership

Question 33

Besides implied duties and duties stated in the partnership agreement, what other duties do partners have to the other partners?

Answer 33

Fiduciary duties that cannot be contracted out or altered

Question 34

What are the fiduciary duties owed by the partners?

Answer 34

1) Information - Must give true and all information of all things that could effect the partnership 2) Secret Benefits - Must disclose any benefits received without the firms consent if it is in a transaction involving the firm, must disclose any advantage/opportunity offerred to the firm 3) Duty not to compete - Must pay over to the firm all profits made from a competing business

Question 35

If not stated explicitly by the Partnership Agreement, how can a partnership end?

Answer 35

1a - Termination by Fixed Term 1b - Termination by Notice 2a -Termination by death 2b - Termination by insolvency 3 - Dissolution by law

Question 36

If there is a fixed term given, how does the partnership end? Can it continue after fixed term?

Answer 36

If there is no continuing conduct after fixed term, the partnership dissolves. If there if conduct afterwards, rights and duties remain the same as before the expiration date

Question 37

How can a partnership end if no fixed term is set?

Answer 37

A partner can give notice. If formed by deed, need written notice.

Question 38

What happens to partnership after death/bankruptcy/insolvency?

Answer 38

Partnership is automatically dissolved.

Question 39

Can continue after death/insolvency?

Answer 39

Yeah if other partners pay for their share

Question 40

When does the law dissolve a partnership?

Answer 40

- Mentally incompetency - Partner is permanently incapable of upholding agreement - Partner is guilty of misconduct that could prejudicial affect the business - Partner breaches agreement and unreasonable for other partners to continue - Just and equitable that the partnership is dissolved

Question 41

What is the sequence of payment in dissolution?

Answer 41

1) Payment of debts to non-partners 2) Payment of debts to partners 3) Re-payment of capital contributed to partners 4) Split surplus between partners

Question 42

What is the idea around limited partnerships?

Answer 42

A partnership can obtain capital without borrowing. General partners have unlimited liability like in a partnership Limited partners are only liable to the amount they pay but they cannot take part in managing the business.

Question 43

What is the idea around limited liability partnerships?

Answer 43

Partners are not unlimitedly liable for their partners' actions. They can lose the value of their partnership share but not their personal assets. However, LLPs are still liable for non-partner actions. Need a written agreement stating that it is an LLP. Firm name needs to contain LLP in it. Only certain professions can have LLPs

Question 44

How is a limited partnership different than a limited liability partnerhip?

Answer 44

- Need at least one general partner with unlimited liability - Limited partners lose limited liability if take part in business - Limited partnerships not restricted to professions

Question 45

What is a joint venture?

Answer 45

An agreement between two parties, usually corporations, to jointly manage and provide resources for a specific project and divide the profits. Usually a contractual agreement. Not a separate business

Question 46

Why do joint ventures reduce risk?

Answer 46

Agreement usually limits liability to contribution

Question 47

What is an income trust?

Answer 47

The transfer of income generating assets to a trust

Question 48

How do income trusts work?

Answer 48

- Declaration of trust made, designates trustees - Operated by operating company, overseen by trustees - All income distributed to unit holders