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Business Associations
McGill Faculty of Law
Choudhury, Barnali

Business Associations

Barnali Choudhury – SUMMER 2010

1) SOLE PROPRIETORSHIP

– Single entity investor

– Unlimited liability – proprietor’s personal assets can be seized by creditors if business is owing money.

– Governance- mostly unrestricted (exception: creditors may restrict owner’s ability to do what he wants)

– No perpetual existence – the business dies with the death of the owner. If sold, then new sole proprietor.

Investment, Equity, Debt and Trade Creditor

– Investors in a business are persons who provide funds that are used to acquire assets that will be used in the business

– Equity investor- right to receive a “residual” amount—anything that is left over after all the creditors have been paid off.

– Creditors- i.e. Bank and trade creditors (persons who supplied goods or services on credit) – entitled to receive fixed payments (as opposed to equity investors, who get paid with lower priority, and who don’t get ‘fixed payments’, as in, their payments are not a pre-determined amounts)

– Investments can be made in exchange for a virtually infinite variety of possible benefits.

Agency- Two Concepts

– Legal Relationship

o An agent is a person who affects the legal relationships of another person, the “principal”

o Can affect the legal relations by contract and by tort

o Ex. directors are people hired by the corporation (the shareholders) who act as agents for them. Ex. 2. Partners are agents for each other.

– Agency costs

o A law and economics term referring to the costs that arise when the interests of the investor and the interests of the agent do not align

o Ex. if directors’ interests don’t align with that of shareholders

2) PARTNERSHIP

– Advantages of partnerships:

o Losses: distributed amongst partners

o Ideas: two heads are better than one

o Access to more money: partners pool their money

o Access to more networks: more contacts

– Problems:

o Unlimited liability – just for both partners in this case

o Joint and several liability- if one partner is out of the picture, the remaining partner is forced to pay off all the liabilities of the business.

o Agency problem- if one partner isn’t pulling their weight

Default Rules

– Rules in partnerships are detailed in statutes but they represent default rules

– Default rules are rules that the parties would have agreed to had they put their mind to the issue at hand

– Statutory default rules thus minimize transaction costs by eliminating the need for parties to bargain for them

– Parties are free, therefore, to contract out of the default rules

– But where gaps exist in private contracts, default rules fill those gaps

Types of Partnerships

– Limited Partnership- comprised of one or more partners whose liability is limited to the amount of their investment and one or more “general partners” whose liability is not so limited.

o Limited partners cannot take part in the management of the business. Why not? In order to preserve the general rule that partners are jointly and severally liable, they had to create this rule.

– Limited Liability Partnership- partners are not liable for the acts of their fellow partners or employees unless they were directly supervising the activity that caused the loss.

o Restricted only to certain professionals (lawyers, accountants, doctors, etc).

– Undeclared Partnership- the de facto partnership where parties fail to register for a general or limited partnership; available in Quebec only!

o Why have this? They wanted a structure to encapsulate just joint ventures.

o The de facto partnership in other jurisdictions (not Quebec) is a general partnership.

3) CORPORATIONS

– Key Features:

o Separate existence

§ Assets and liabilities of a corporation are separate from an owner

o Limited liability

§ Allows for limited liability (shareholders are only liable up to the amount of their investment) and management of business (directors can also be shareholders, no restriction on participation in management) unlike limited partnership

o Perpetual existence

§ When one person sells their shares of the corporation, the corporation keeps running exactly the way it was.

Investors in a corporation

– Shareholders

o Equity investors

o Entitled to residuals; do not own assets of corporation – instead, you own a bundle of rights in the corporation.

o Entitled to certain rights such as shares in distribution of profits, distribution of the net proceeds of liquidation/dissolution, right to vote on important matters

§ These rights are all dependant on the type of share you own. Ex. Not all shareholders will have a right to dividends.

– Query: Do Shareholders “own” the corporat

he silence of the mandatary.

REQUIREMENTS:

– (1) Agent must be under the control of the principal

o The greater the power of control over the agent, the greater the likelihood that the principles of agency… are applicable

– (2) Requires consent of principal and agent to relationship

o The parties can be held to have consented to an agency relationship “if they have agreed to what in law amounts to such a relationship, even if they do not recognize it themselves and even if they have professed to disclaim it.”

o Consent can be either express or implied. → 2132 CCQ.

– (3) Authority is given by the principal to the agent.

o Authority- what an agent can and cannot do and how he can affect the legal position of the principal

NOT REQUIRED

– Do not need to use the term “agent” explicitly to describe the relationship

– Do not need a contract of agency to define relationship

Agency versus Employment

– Agents have right to enter into contractual relations on behalf of the employer, while employee may not

– Agent and employee may not owe the same fiduciary duties to the employer

– A person who is an employee may also be an agent of the employer

– A person can also be an agent without being an employee

Creation of Agency

– (1) Expressly by contract or mandate

– (2) Implicitly by conduct of parties

– (3) Without a special contract

– (4) Without a contract in writing

– (5) Without anything having been expressly agreed as to terms of employment, remuneration, etc.

– (6) By estoppel (detrimental reliance):

A person who by words or conduct has allowed another to appear to the outside world to be his or her agent, with the result that third parties deal with that other as the first person’s agent, cannot afterwards repudiate this apparent agency, if to do so would cause injury or loss to such third parties. → see