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Summary Canadian Business Law, Chapter 7, ISBN: 9781772552812 BUSI2601
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CHAPTER 7FORMS OF CARRYING ON BUSINESS
FORMS OF CARRY ON BUSINESS
● Commonly found in sole proprietorship, partnership and corporation businesses
● The business structure involves creating a legal regime that makes decisions on the
creation of the business, its internal affairs, taxes, relation to other businesses and
extent of legal responsibility towards liabilities
●
IMPORTANCE OF CHOOSING A BUSINESS FORM
● Business forms clarify your legal relationships with colleagues and co-workers.
● Choosing the appropriate business form can strike the right balance between the
need for simplicity and the need to limit your potential liability.
● Choosing the appropriate business form can help you plan for the future.
● Your choice of business form will affect the amount of professional assistance that is
required.
SOLE PROPRIETORSHIP
● No legal separation between the owner and the business
● Typically small businesses with few or no employees, operating from a single
location
● Complete control over business decisions
● Sole proprietor will reap the financial benefits yet will be personally subject to
unlimited liability
CREATION
● Sole proprietorship under a name other than that of the owner, must be registered
under the Business Names Act in Ontario.
○ This allows the public to know with whom to take legal action against if
problems arise.
○ Failure to register may result in fines up to $2,000
● Simply registering a name does not prevent others from using it, but rather must
register it as a trademark under the Trade-marks Act.
LEGAL CHARACTERISTICS
● Sole proprietorship has no legal existence apart from its owner and can't be sued on
its own
○ The owner is the legal entity that would be sued on behalf of the business
● Sole proprietorship also cant enter into its own contract, but rather the owner has to
enter on its behalf
● Any income is deducted as part of personal tax return
CONDUCTING BUSINESS
● Sole proprietor runs business on their own or with help from family and friends and
operates from a single location (home)
ADVANTAGES AND DISADVANTAGES
1. Cost, Complexity & Control
, ○ It is very simple to run a sole proprietorship - no documentation, no consulting
others and no stakeholders
2. Participation in Profits
○ Sole proprietor reaps all financial benefits and has full decision-making power
over the redistribution of profits (either back into the business or personal)
3. Tax Implications
○ CRA treats sole proprietorship as a source of income or business loss
○ Business loss can be set off against personal income from other sources to
reduce tax
4. Liability
○ Sole proprietor is personally subject to unlimited liability - full responsibility for
any debt incurred or loss caused by a business
i. Become personally liable also for any contract breaches
○ Creditors can force sole proprietors to sell personal assets to meet business
obligations
5. Considerations concerning Expansion
○ Since only 1 person can own a sole proprietorship, it impacts how business
financing works
○ Business form allow investment through ownership
○ Business can raise capital through equity investment and debt (i.e. no shares
to be bought)
INTRODUCTION TO PARTNERSHIPS
● Partnership - form of carrying on business whereby two or more persons operate a
business, with no legal separation between the owners and the business
● Partnership agreement - contract signed by all partners that sets out how the
partnership will operate and how it will end
● Where there is no partnership agreement, the relationship between businesses will
be governed by the relevant provincial partnership and common law
A partnership exists where the partners agree to:
1. Pool their capital for a common purpose
2. Share in the profit or loss of the business
3. Make decisions and manage the business together
4. Exercise authority to bind the partnership to contracts with third parties
5. Share liability
3 types of partnerships in Canada:
1. the general partnership
2. the limited partnership
3. the limited liability partnership
GENERAL PARTNERSHIP
CREATION
● Created when two or more individuals come together to run an unincorporated
business
LEGAL CHARACTERISTICS
, ● Not an independent legal entity. Cannot enter into legally binding contracts or protect
its owners from legal liabilities for injuries
● Individual partners have joint and several liability - financial responsibility requiring
all parties to contribute equally, but also making each party responsible for the entire
amount owed - for the actions of the firm
● If one partner is unable to pay their share, the other partner must pay the full amount
● The purchaser can sue the business in the firm name and each partner can be sued
individually - only when the firm is named as a defendant
● Similar to a sole proprietorship, each partner is liable to the full extent of their
personal assets for all debts and other obligations of the partnership
ADVANTAGES & DISADVANTAGES
Conducting Business
● In a general partnership, all partners are equal
● Decisions reached through informal or formal discussion and agreement.
● Business income is first used to pay partnership expenses and then allocated to
long-term planning projects. The remaining is divided among the partners, otherwise
1. Cost, Complexity & Control
○ Once 2+ people do business to profit, a general partnership is created
○ Rare that partners are satisfied with provincial and common law rules, so
lawyers are consulted on business structure
○ Partnership agreement can be flexible, reflect different interests, power and
liability (can assume different degree of risk)
2. Participation in Profits
○ Businesses may have more than 1 owner and add as needed for additional
capital increases.
○ If no terms/agreement, then equal participation in profit will occur
3. Tax Implications
○ CRA treats partnerships as a source of income or business loss
○ Business loss can be set off against personal income from other sources to
reduce tax
○ Share of profits or loss is portioned equally (or according to terms set) among
partners and filed
4. Liability
○ Partners are personally subject to unlimited liability - full responsibility for any
debt incurred or loss caused by a business
i. Become personally liable also for any contract breaches
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