Chapter 9: THE ORGANIZATION OF A BUSINESS PDF

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This summary note includes general ideas of how to set up a business. forms of business such as sole proprietorship, partnership, limited partnership. It also introduces agency and franchises...

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CHAP 9 – THE ORGANIZATION OF A BUSINESS I. SETTING UP A BUSINESS 1. Choose a name:  Cannot use a name that is similar to the existing one (cause trademark violation)  If not an actual corporation, cannot use terms (Limited, Ltd., Corp., or Inc.) in the name.  2 Liabilities of a Business:  Contract: $ owned to suppliers, employee’s wages, taxes, rent and bank loans.  Tort: relates to the public (occupier’s liability – slip and fall, vicarious liability, products liability).  Protection of Personal Assets:  Transfer to spouse: break up - still has a claim for ½ of the net matrimonial property.  Incorporation: creditors demand personal guarantees from small business b4 granting loan.  Insurance: can cover tort only, cannot assist in protecting against business trade debts. 2. Select form – sole proprietorship, partnership, limited partnership, or incorporation. 3. Register or incorporate 4. Obtain municipal/professional business license, if applicable, see if business complies with local zoning law. II. FORMS OF BUSINESS 1. Sole Proprietorship – one person, unlimited liability  not the best form.  Registration: MUST be registered if not using your name, renew every 5 years or else may be fined, the owner cannot sue or collect debts.  Disadvantages: Though it is simple, inexpensive and easy to set up:  Has high failure rates (lack enough $, skills or not pay for professional advice).  Hard to raise $ (banks are unwilling to lend, borrow from fam & friends)  Unlimited personal liability.  If successful  tax disadvantages – pay on their profits at income tax rates (much higher). 2. Partnership – 2 or more,  riskiest form. Pros: sharing control, pool knowledge, experiences, and resources. Some problems: disagreements, dishonesty, incompetence.  Orally/writing. MUST register partnership name & list the partners or else same penalties.  3 tests if had been created: Joint capital? Intention to share loss/profit? Joint management? (1 of 3)  Unlimited Liability: Jointly liable  choose partners carefully.  A partner’s responsibilities to the partnership: strong obligations of trust  fiduciary duty, could not take advantage of others, fail to reveal business opportunities to the other.  A partner’s responsibilities to outsiders: indoor management rule – any private restrictions are not binding on outsiders unless they are told.  2 Limitations of a Partner’s rights: contracts that are made outside the normal course of the business are not binding on the partnership; can be held to any agreement that a partner makes on behalf.  Partnership Agreement: should write (11 typical clauses p.352) or a provincial Partnership Act will apply but may not be appropriate for 21st century businesses.  Dispute in a Partnership: optimistic start but fights in the future.  Buy-Sell Clauses in a Partnership Agreement: many situations (wish to leave, personality conflict, deaths, retirement or long-term disability)  4 methods of fixing value:  Expert appraisal: often avoided due to potential costs (chartered accountants – huge fees).  A fixed-price formula: value a partner’s holding as X times earnings…  Arbitration: Cost can be underestimated cause might have to retain lawyers.  A Shotgun Clause  avoid cost of an expert – 1 partner must first make an offer at a specific price. The other has the choice to either sell at that price or to buy the offering partner’s shares at that price  true value (but financial problem?) + Forced Buy-Sell Clauses: when an event, the partner (or the heirs) must sell that person’s shares and the other partners must purchase them. No choice + Voluntary Buy-Sell Clause: Allow a partner to end the partnership at will.  1 Partner’s Death: Partnership dies with the partner, but in reality business continues unless no $ to pay the claims against it. Problems of surviving owners: buying the deceased’s shares, finding $ to pay & establishing the cheapest, fairest way of finding the share’s value. 3. Limited Partnership – some partners limit their liability to the amount of their capital contributions and are not active in conducting the business. 2 types of partners: limited and general.

 Cannot seize the personal assets of a limited partner (not joint day-to-day running, give advice)  General partner: usually runs the business.  MUST register as a limited partnership, proper form – firm’s name, general & limited partners’ name & address, date the partnership begins, date the limited partnership is to end.  Limited become liable as General partners if: not registered; continues beyond expiry date without renewal to extend; false or misleading statements; Limited takes an active part in management; Limited’s name is used with the firm’s name or they claim to be a general. 3’. Limited Liability Partnerships (LLP) – Partners who are not negligent are not personally liable for losses caused by the negligence of another partner/employee directly supervised by another partner.  MUST register as LLP, clients are aware.  This ONLY protects the innocent partner’s PERSONAL assets, not the BUSINESS assets. Also NOT apply to partnership debts from contracts or due to fraud.  Only permitted to be used by professionals (law/accounting firms)  Ending a partnership: 1 common term – if 1 partner out, the partnership is not dissolved, the remaining partners buy that partner’s shares under buy-sell clause… p.359 IV. AGENCY – 1 party represents another in the formation of legal relations. 1. Agency relationship  An Agent is an authorized person to represent and act on behalf of principal, sets up a contract btw a principal and the 3rd party.  Agent’s acts, when done within the scope of authority, bind the principal. If the agent acted properly and dispute arises btw principal and 3rd party, the agent is not liable.  Agents can be independent contractors or employees (but NOT all employees are agents).  Partnership: Partners are also Agents for each other.  Sign: Agent’s name “per” the disclosed Principal 2. Authority  The principal gives the agent power/authority – writing/orally to make contacts on their behalf. Ex: Power of attorney (a living will) – make medical/financial decisions for those who are unable.  Authority can be suggested by the principal’s conduct.  Act beyond authority  P is not bound, but if accept the deal  enforceable.  Though t is possible to act for an undisclosed principal, the agent should disclose or else personally liable. If the 3rd found out, they can sue either agent/principal but NOT both.  If there is full disclosure of the relationship and principal agrees, agent can act for >1 principal. 3. Agent’s duties  Agents owe the principal a fiduciary duty (the highest duty of care, utmost good faith).  Should not be in conflict of interest/put their self-interest ahead of the principal’s best interests.  Must act within the scope of their authority, follow the instructions and keep principal updated.  Personally liable for the torts they commit. The Principal – vicariously liable (within the scope). 4. Principal’s duties  Must pay the agent for the work if no fee has been stated.  Must assume liability for contracts that the agent has signed on their behalf.  If doesn’t want to use agent  Must inform the 3rd parties, or else could be bound by that agent’s actions. V. FRANCHISES 1. What is a Franchise? – is a special kind of license, granting the right to use trademarks, trade names, and a business system for products and services.  Made between the franchisor (founding/parent company) and the franchisee (small business outlet)  Franchisor can expand without expenditure of capital, combine the best of large & small business… 2. The standard franchise agreement – governed by normal contract law. Some unique terms:  Initiation fee/franchise fee: an up-front payment that varies with the prestige of the franchise.  Royalties: usually paid monthly to the parent company, based on % of sales/profits (1-14% of gross sale).  Advertising fee: usually expressed as a flat rate.  Optional ads fee - sometimes.  Common terms of the standard form franchise agreement  Non-competition: franchisee agrees not to be involved in a competitive business during agreement term.  Confidentiality: not to reveal internal business systems, extend after expire.

 Tied selling: franchisee purchase supplies only from parent company/approved suppliers  volume discount; however, some have been suspected of abusing the power.  Exclusivity: prohibit parent company from selling the rights to another franchise within a defined area without the written consent of the franchisee.  Right to sue: many agreements acknowledge that franchisor does not intend to be bound  parent company cannot be sued if it violates the agreements  should be wary and investigate thoroughly.  May have a termination date and no right for franchisee to renew the agreement even if it’s profitable. 3. Complaints by Franchisees  Most common: They are not earning the profits that they expected.  The parent companies always deny the allegations (statements made that haven’t been proved):  Franchisor makes its $ by taking initiation fees, making impossible for franchisee to carry on business, then closing the franchise. The business is then resold to a new franchisee  pays a large initiation fee  Franchisor takes out the lease on the site (head lease)  leases the site in turn to franchisee (sublease).  Franchisee pays rent directly to franchisor, royalty payments ~ part of the rent  exceptional power.  Volume debates: franchisees allege that owners receive kickbacks from suppliers.  Franchisor inflates average sales figures during sales representations.  Termination date, no right to renew…  Giving a Deposit: Always dangerous, if they agree $ is to be held in trust  cannot be used for any other purpose, or else personally liable for the amount. 4. Buying a Franchise – the purchase of a franchise is a contract  all remedies in contract law apply. B4 signing/handing over $: check other franchisees; retain lawyer/accountant, bank manager to check franchisor.  Many provinces have specific laws regulating franchises & require the franchisor to issue complete disclosure document prior to a franchise agreement being signed.  Many provincial laws also impose a duty of good faith and fair dealing on franchisors and franchisees....