1. CHAPTER PowerPoint ® Presentation Prepared By Susan McManus, Mount Royal College CHAPTER PowerPoint ® Presentation Prepared By Susan McManus, Mount Royal College © 2005 McGraw-Hill Ryerson Ltd., All Rights Reserved. 6 Sole Proprietorship, Agency, and Partnership

2. Essentials of Canadian Business Law, 1st Canadian EditionSlide 6-1 © 2005 McGraw-Hill Ryerson Ltd., All Rights Reserved. LEARNING OBJECTIVES Consider legal environments of business organizations Examine forms of business organizations Outline areas of law applicable to sole proprietorships Examine the law related to agency relationship Examine the law of partnership CH 6

3. Essentials of Canadian Business Law, 1st Canadian EditionSlide 6-2 © 2005 McGraw-Hill Ryerson Ltd., All Rights Reserved. Forms of Business Organization Business Organizations Legal relationships that carry on business Requirements due to concern for public safety and protection Legislation governs the formation and operation of the business organizations, and the law of contract applies to the conduct of business activities Types of business organizations:  Sole proprietorship  Agency  Partnership  Corporation 6.1

4. Essentials of Canadian Business Law, 1st Canadian EditionSlide 6-3 © 2005 McGraw-Hill Ryerson Ltd., All Rights Reserved. Sole Proprietorship “one-owner business” Sole proprietor: Owns all assets Carries on business activities Entitled to all profits Responsible for all debts Laws: Licensing and registration Operation of business based on contract law Who would be a sole proprietor? 6.2

5. Essentials of Canadian Business Law, 1st Canadian EditionSlide 1-4 © 2005 McGraw-Hill Ryerson Ltd., All Rights Reserved. Agency— Contractual Relationships Figure 6-1

6. Essentials of Canadian Business Law, 1st Canadian EditionSlide 6-5 © 2005 McGraw-Hill Ryerson Ltd., All Rights Reserved. The Agency Relationship Agency A person or business acts on behalf of another person or business Parties in Agency  Principal hires an agent to carry out business dealings with a third party, usually to allow the principal to enter a contract with the third party Relationship may be based upon  Contract – verbal or written with set terms  Agency by conduct or agency by estoppel – by words or actions agency is created 6.3

7. Essentials of Canadian Business Law, 1st Canadian EditionSlide 6-6 © 2005 McGraw-Hill Ryerson Ltd., All Rights Reserved. The Agency Relationship (Cont’d) Duties & Responsibilities of the Parties Agency is based upon utmost good faith - relationship is of special trust and confidence 6.3

8. Essentials of Canadian Business Law, 1st Canadian EditionSlide 6-7 © 2005 McGraw-Hill Ryerson Ltd., All Rights Reserved. The Agency Relationship (Cont’d) Principal’s Duties:  Pay the fixed fee or a reasonable fee for services rendered  Compensate for any reasonable expenses in carrying out the services 6.3

9. Essentials of Canadian Business Law, 1st Canadian EditionSlide 6-8 © 2005 McGraw-Hill Ryerson Ltd., All Rights Reserved. The Agency Relationship (Cont’d) Agent’s Duties: 1.Obey all lawful instructions and keep information confidential 2.Inform the principal and be in constant contact (notice to an agent is notice to the principal) 3.Maintain the standard of skill required with no delegation unless permission is granted 4.Account for goods or money 5.Place the best interest of the principal first 6.Do not act for both the principal and third party without express consent 6.3

10. Essentials of Canadian Business Law, 1st Canadian EditionSlide 6-9 © 2005 McGraw-Hill Ryerson Ltd., All Rights Reserved. The Agency Relationship (Cont’d) Agency by Conduct or Estoppel Principal by words or conduct leads the third party to believe the agent has authority (apparent authority) Principal will be bound by the agent’s actions Created by:  Adoption of a contract negotiated by another  No notification of agency termination  No notification of restrictions on the agent’s authority (agent then exceeds the actual authority) 6.3

11. Essentials of Canadian Business Law, 1st Canadian EditionSlide 6-10 © 2005 McGraw-Hill Ryerson Ltd., All Rights Reserved. The Agency Relationship (Cont’d) Agency by Operation of Law Agency of necessity – agent acts in an emergency to prevent a loss; a pre-existing legal relationship exists Ratification of Contracts by a Principal Acceptance of contract made by an agent who exceeds authority or has no authority 6.3

12. Essentials of Canadian Business Law, 1st Canadian EditionSlide 6-11 © 2005 McGraw-Hill Ryerson Ltd., All Rights Reserved. The Agency Relationship (Cont’d) Third Parties and the Agency Relationship Agency is clearly stated  only the principal is liable to the third party Agent contracts without disclosing the agency  the agent will be liable to the third party Agent contracts on behalf of an undisclosed principal  the third party may hold either the agent or the principal liable (not both) Agent contracts with no authority or on behalf of a nonexistent principal  the agent will be liable for breach of warranty of authority 6.3

13. Essentials of Canadian Business Law, 1st Canadian EditionSlide 6-12 © 2005 McGraw-Hill Ryerson Ltd., All Rights Reserved. The Agency Relationship (Cont’d) Liability of Principal & Agent to Third Parties in Tort Vicarious liability – principal may be liable for torts committed by the agent in the course of the agency agreement Termination of the Principal–Agent Relationship 1. Notice – principal should notify third parties or the principal may be liable by apparent authority 2. Completion of task or service 3. Incapacity of either party 4. Bankruptcy of the principal 6.3

14. Essentials of Canadian Business Law, 1st Canadian EditionSlide 6-13 © 2005 McGraw-Hill Ryerson Ltd., All Rights Reserved. The Law of Partnership Partnership A legal relationship between two or more persons for the purpose of carrying on a business with a view of profit Formed and governed by:  Legislation – Partnership Act  Conduct - a third party believes a person through his or her words or conduct is a partner Nature of a Partnership Sharing of profits Contribution of capital Active participation in management Unlimited liability for losses by the partnership 6.4

15. Essentials of Canadian Business Law, 1st Canadian EditionSlide 1-14 © 2005 McGraw-Hill Ryerson Ltd., All Rights Reserved. Liability of Partnership to Third Parties Figure 6-3

16. Essentials of Canadian Business Law, 1st Canadian EditionSlide 6-15 © 2005 McGraw-Hill Ryerson Ltd., All Rights Reserved. The Law of Partnership (Cont’d) Liability of a Partnership or Firm for the Acts of a Partner Every partner is the agent of the firm in the ordinary course of partnership business Firm is liable for torts, and careless and improper acts committed by the partner in the ordinary course of partnership business Partners have unlimited liability (jointly and severally) for losses by the firm, and may therefore be liable for the actions of other partners 6.4

17. Essentials of Canadian Business Law, 1st Canadian EditionSlide 6-16 © 2005 McGraw-Hill Ryerson Ltd., All Rights Reserved. The Law of Partnership (Cont’d) Rights and Duties of Partners to One Another Usually set out in a partnership agreement, if not defined by the Partnership Act Partnership property brought into or acquired by the partnership and is held and used for the benefit of the partnership Partnership is based on utmost good faith as partners must perform in the best interests of the partnership as a whole (accounting of money and information, and not to compete with the partnership) 6.4

18. Essentials of Canadian Business Law, 1st Canadian EditionSlide 6-17 © 2005 McGraw-Hill Ryerson Ltd., All Rights Reserved. The Law of Partnership (Cont’d) Dissolution of a Partnership Notice to dissolve, usually a term of the agreement, may include  Disposition of the firm name  Method of determining value of business assets and partners’ shares Upon completion of specific term or task Incapacity or death of a partner Unlawful purpose of the partnership 6.4

19. Essentials of Canadian Business Law, 1st Canadian EditionSlide 6-18 © 2005 McGraw-Hill Ryerson Ltd., All Rights Reserved. The Law of Partnership (Cont’d) Dissolution of a Partnership Court order:  Circumstances that are “just and equitable” Once dissolved firm’s assets are liquidated and the partners’ shares determined Firm’s debts must be paid first:  if a deficit occurs partners contribute in proportion to share of profits entitlement  if there is a bankruptcy then contribution is by the ratio of capital account NOTICE – should be given to all customers and the public at large (provincial Gazette) to prevent further liability 6.4

20. Essentials of Canadian Business Law, 1st Canadian EditionSlide 1-19 © 2005 McGraw-Hill Ryerson Ltd., All Rights Reserved. Basic Characteristics and Differences between a Sole Proprietorship and a Partnership Figure 3-3

21. Essentials of Canadian Business Law, 1st Canadian EditionSlide 6-20 © 2005 McGraw-Hill Ryerson Ltd., All Rights Reserved. Limited Partnership Limited Partnership: set by legislation Limited partners: limited liability; limited to capital contributed Limited partners: no active participation in the firm, if they participate they become general partners with unlimited liability Limited Liability Partnerships Partners have unlimited liability for the firm debt and their own negligence, but no responsibility for the negligence or omissions of other partners (usually professional practices) 6.5

22. Essentials of Canadian Business Law, 1st Canadian EditionSlide 6-21 © 2005 McGraw-Hill Ryerson Ltd., All Rights Reserved. Registration of Partnerships To provide creditors and others with information concerning the business and persons who own it Declarations of basic partnership information must be filed at a government office Changes usually must be filed 6.7

23. Essentials of Canadian Business Law, 1st Canadian EditionSlide 6-22 © 2005 McGraw-Hill Ryerson Ltd., All Rights Reserved. Joint Ventures Two or more businesses contract to undertake a specific project May create a separate corporation or be governed by contract Based on utmost good faith 6.8

24. Essentials of Canadian Business Law, 1st Canadian EditionSlide 6-23 © 2005 McGraw-Hill Ryerson Ltd., All Rights Reserved. SUMMARY Sole Proprietorship “One-owner” with unlimited liability Agency Principal obtains the services of an agent to negotiate a contract with a third party Based on utmost good faith Partnership Two or more persons carrying out business for profit Based on utmost good faith, and partners are agents for the firm Unlimited liability unless Limited Partnership or LLP CH 6