BUSINESS LAW AND ETHICS
410-C01-HE & 410-T011
Forms of carrying Business
Chapter 02, ch7 of the book – Part 01
• Discuss sole proprietorship
• Describe partnership
• Explain how a partnership can be created
• Review the rights and duties of partners
• Discuss the liabilities that may be incurred by partners
• List the advantages of partnership
• Explain how a partnership can be dissolved
Types of Business Organization
Sole Proprietorship – an individual carrying on business alone
Partnership (General, Limited and LLP) – two or more people carrying
on business together for the purpose of making a profit
Corporation – a legal entity, separate from the people who own and
Piercing the corporate veil or lifting the corporate veil is a legal
decision to treat the rights or duties of a corporation as the rights or
liabilities of its shareholders.
Comply with the following to maintain your corporate veil.
Maintain a separate bank account for the corporation or LLC.
Don't commingle personal assets with those of the corporation or LLC.
Don't divert corporate or LLC assets for personal use.
Don't tell a creditor that you will personally guarantee payment of the
corporation or LLC's debts.
Other forms of business
There are other ways for people to work together to carry on a commercial activity.
A non‐profit society can be set up under legislation, this also creates a separate
legal entity, but the procedure of incorporation and the obligations of those
involved are quite different.
A holding corporation holds shares in other corporations.
A joint venture involves several different corporations that band together to
accomplish a major project. They may form a separate corporation or a
An individual carrying on business alone
• Must adhere to licensing and governing laws:
- Registration and licensing
- Zoning bylaws
- Comply with workers compensation, employment insurance and income tax regulations
- Keep sufficient records to satisfy government agencies
• Unlimited liability corporation (ULC) is a corporation designation,
wherein shareholders are liable up to unlimited amounts for any liability,
act or default of the corporation. By comparison, in most corporations,
shareholders are not usually liable due to a limited liability model
The sole proprietor owns all the assets, receives all the profits of the business, and
is responsible for all its debts and liabilities. This unlimited liability can be the most
significant disadvantage of the sole proprietorship. When liability is incurred for
breached contracts or torts, or where there is insurmountable debt, the whole
burden falls on the sole proprietor.
Under the principle of vicarious liability, the sole proprietor is responsible for any
tort committed by an employee during the course of employment.
A group of people carrying on business together with the object of
making a profit
Not a separate legal entity (A separate legal entity is a person
recognized by law - a "legal person". The entity has its own legal
rights and obligations, separate to those running and/or owning the
A partnership is presumed:
• Joint contribution of capital to establish a business
• Intention to share expenses, profits or losses
• Joint participation in the management of a business.
Creation by Contract
Best to create a partnership is through a contract
• Statutory rights and obligations of the partners can be modified
by agreement. Investment and profit percentages should be
laid out clearly
Creation by Contract (Cont.)
Partnership Agreement should deal with:
• Duties of each partner and what type of work or talent each is expected to
• Amount of time and money to be committed to the business by each partner
• How the profits are to be shared and how the capital is to be distributed
• Any limitations on the powers or authority of each partner
• Methods of resolving any disputes between the partners and how the business is to
• The circumstances in which the partnership will be dissolved
Partners’ liability is not limited to the assets of the partnership
• Personal assets may be used to satisfy claims against partnership
Insurance coverage is important.
• A third party can collect from any partner
• Requirements of unanimous consent protects partners
• Less expensive to form and operate than incorporation
• Some tax advantages available
• Limited partners are liable only to the extent of their investment
The limited partner is only liable for the sum of their capital contribution – also called a liability sum. ... A limited partner is a limited partnership member who makes a
contribution to the limited partnership and is only liable for the company's liabilities up to the amount of this contribution.
Avoids the unlimited liability that goes with being a general partner
Provides some of the advantages of incorporation to partnerships
• Limited partners cannot take part in control of the business
• Registration is required for limited partner
Limited Liability Partnerships (LLP)
• A limited liability partnership (LLP) is a partnership in which some or all
partners (depending on the jurisdiction) have limited liabilities. It
therefore can exhibit elements of partnerships and corporations.
• Eligible professionals: Accountants, lawyers, dentists, etc.
• The victim cannot pursue individual assets of non-negligent partners.
Dissolution of a Partnership
• Usually a partnership is easy to dissolve, requiring only notice to that effect by one of
• The death, bankruptcy or insolvency of a partner
• Subject to the partnership agreement, a partnership is dissolved by the death or insolvency of any partner.
Fixed-term expiry of partnership
PARTNERSHIP WITH A FIXED TERM A partnership wherein the term for which the
partnership is to exist is fixed or agreed upon or one formed for a particular undertaking,
and upon the expiration of the term or completion or the particular enterprise, the
partnership is dissolved
• Partnership can be dissolved by request to the court
Payment of debts and Liability
Personal assets of partners
Distribution of Assets
After payment of debts:
• Capital and remaining funds will be paid to partners
Distribution can be set out in partnership agreement
Keep in mind the distinction between a limited partnership and the more recent
limited liability partnership. A limited partner is in effect an investor who does not
participate in the partnership business, his liability is limited to losing what he has
invested. However, a limited liability partner is an active professional who practices
his/her profession with other partners and who is liable for his/her own negligent
acts and for those committed by others under his/her supervision.
*. This unlimited liability can be the most significant disadvantage of the sole proprietorship. When liability is incurred for breached contracts or torts, or where there is insurmountable debt, the whole burden falls on the sole proprietor.
*Public notice of dissolution required to prevent further liability
Subject to the partnership agreement, when dissolving a partnership, the debts must be paid first out of profits and, if they are insufficient, out of the capital the partners originally invested. If there is still not enough money to pay the debts, the creditors can then turn to the partners themselves, who are liable in the proportion in which they were entitled to share profits. Remember that all partners are liable to pay the creditors no matter what the partnership agreement says.
Once all creditors have been paid and the other obligations of the partnership are satisfied, any assets still remaining are applied first to pay back the partners for advances and then to pay back the original capital investment. Any remaining funds are divided among the partners on the established basis for sharing profits.