CHAPTER

6
Sole
Proprietorship,
Agency, and
Partnership

Microsoft® PowerPoint® Presentation Prepared By

Gail McKay, LLB, Thompson Rivers University

© 2008 McGraw-Hill Ryerson Ltd., All Rights Reserved.

 OBJECTIVES

1. To survey various forms of business

organizations and the legal environment
associated with each

2. To outline the effects of law upon sole

proprietorship and partnership

3. To examine the way the law of agency

impacts upon these forms of business
organization

Fundamentals of Canadian Business Law, 2nd Canadian Edition Slide 1-2 © 2008 McGraw-Hill Ryerson Ltd., All Rights Reserved.
 FORMS OF BUSINESS ORGANIZATION

Given the hindsight brought to carrying on

business by the law, it is not surprising that the
business world is highly regulated

Even the most simple business structure must

comply with regulations, licences and other
obligations in return for a right to offer services

The goal of these legal rules is the protection of

the general public and of other business
persons from the unscrupulous or unlicensed

Fundamentals of Canadian Business Law, 2nd Canadian Edition Slide 1-3 © 2008 McGraw-Hill Ryerson Ltd., All Rights Reserved.
 SOLE PROPRIETORSHIP

A sole proprietorship has one owner who

owns all business assets, is entitled to all
profits and is responsible for all debts

Employees may be hired, but successes or

failures depend on the sole decision maker

Licensing of services is required by trades,

professions and most municipalities to ensure
the qualifications of those offering services to
the public

Fundamentals of Canadian Business Law, 2nd Canadian Edition Slide 1-4 © 2008 McGraw-Hill Ryerson Ltd., All Rights Reserved.
 SOLE PROPRIETORSHIP:
DISADVANTAGES

The freedom of sole proprietors, the

flexibility, speed and agility of their businesses
in responding to business opportunities, is
counter balanced by personal risk

The personal assets of a sole proprietor are not

discrete from the business assets and are
therefore vulnerable to business debt

Insurance may help to allay concerns for

certain types of business liability

Fundamentals of Canadian Business Law, 2nd Canadian Edition Slide 1-5 © 2008 McGraw-Hill Ryerson Ltd., All Rights Reserved.
 THE AGENCY RELATIONSHIP

An agent is a person or business who acts on

behalf of a principal, usually according to the
terms of an agent-principal contract for service

If the duties described in the agent-principal

contract are carried out as contemplated (and
only as contemplated) by the agreement, the
principal will be bound by the acts of the agent

A principal-agent agreement may be verbal, in

writing, or created by conduct or estoppel

Fundamentals of Canadian Business Law, 2nd Canadian Edition Slide 1-6 © 2008 McGraw-Hill Ryerson Ltd., All Rights Reserved.
 DUTIES OF A PRINCIPAL TO AN AGENT

The goal of an agency relationship is

usually the agent’s negotiation, acting within
the scope of his or her authority, of contracts
between the principal and third parties

In the utmost good faith relationship between

an agent and principal, the principal has
several duties, including the payment of the
agent’s fee for services rendered, as well as
the payment of compensation for expenses
incurred by the agent in the performance of
services

Fundamentals of Canadian Business Law, 2nd Canadian Edition Slide 1-7 © 2008 McGraw-Hill Ryerson Ltd., All Rights Reserved.
 DUTIES OF AN AGENT TO A PRINCIPAL

Obedience of lawful instructions from a

principal is the foremost duty of an agent, along
with the duty of confidentiality

Further, there is a requirement for full and up-to-

date disclosure by an agent to a principal,
as well as the maintenance of current
professional skills

An agent must act only for a principal and only

in his or her best interests, and must keep funds
received for a principal in a trust account
Fundamentals of Canadian Business Law, 2nd Canadian Edition Slide 1-9 © 2008 McGraw-Hill Ryerson Ltd., All Rights Reserved.
 AGENCY BY CONDUCT

If there is no express agreement between a

principal and an agent, an agency relationship
may arise by words or conduct which convey to
a third party the impression that an agent has
authority to represent a principal

If a third party relies on this impression, the

principal cannot later deny it since it has
created an agency by conduct or estoppel

This is so even though the agent’s authority is

not real
Fundamentals of Canadian Business Law, 2nd Canadian Edition Slide 1-10 © 2008 McGraw-Hill Ryerson Ltd., All Rights Reserved.
 OPERATION OF LAW & RATIFICATION

An agency of necessity may be created in

the event of an emergency if a pre existing
legal relationship is already in place between
and agent and principal

In the emergency, the agent acts for the

principal without instructions in order to
prevent a loss

An agent acting without authority may also

enter into a contract with a third party which a
principal, after the fact, decides to ratify
Fundamentals of Canadian Business Law, 2nd Canadian Edition Slide 1-11 © 2008 McGraw-Hill Ryerson Ltd., All Rights Reserved.
 THIRD PARTIES AND THE AGENCY

The principal is liable to third parties in

cases where the agency relationship is clearly
stated, where the agent is acting within his or
her authority, or where there is agency by
estoppel

An agent who holds him or herself out to be a

contracting party, who acts for an undisclosed
principal without explaining the fact to a third
party, or who claims to act for a fictitious non
existent principal, is liable to the third party

Fundamentals of Canadian Business Law, 2nd Canadian Edition Slide 1-12 © 2008 McGraw-Hill Ryerson Ltd., All Rights Reserved.
 TERMINATION OF AGENCY
RELATIONSHIP

An agency may be terminated in a number

of different ways

It may end after a specified time, by notice of

one of the parties, by the incapacity of one of
the parties, by completion of a particular task,
or by bankruptcy on the part of the principal

To avoid ongoing liability, a principal should

notify third parties when an agency relationship
has been terminated

Fundamentals of Canadian Business Law, 2nd Canadian Edition Slide 1-13 © 2008 McGraw-Hill Ryerson Ltd., All Rights Reserved.
 THE LAW OF PARTNERSHIP

A partnership is a relationship between two

or more persons who carry on business
together with a view to a profit

Partnerships are governed by provincial and

territorial legislation

Partnership law has recently developed a

hybrid between the partnership and the
corporation known as the limited liability
partnership (LLP)

Fundamentals of Canadian Business Law, 2nd Canadian Edition Slide 1-14 © 2008 McGraw-Hill Ryerson Ltd., All Rights Reserved.
 NATURE OF A PARTNERSHIP

The carrying on of business with a view to

making a profit excludes from the scope of a
formal partnership associations such as
charities, social clubs and amateur sports clubs

The sharing of net profits is one of the

hallmarks of a partnership, as are the actions
of contribution to capital, participation in
decision making, and personal liability for
partnership losses

Fundamentals of Canadian Business Law, 2nd Canadian Edition Slide 1-15 © 2008 McGraw-Hill Ryerson Ltd., All Rights Reserved.
 PARTNERSHIP VERSUS CO-OWNERSHIP

Partnership arises by express or implied

contract; co-ownership occurs by transfer of a
co-owner’s interest in property or inheritance

A partner is an agent of each of the other

partners; a co-owner is not an agent of other
co-owners

A partnership is governed by partnership

legislation and dissolution processes;
legislation associated with jointly held property
governs co-ownership
Fundamentals of Canadian Business Law, 2nd Canadian Edition Slide 1-16 © 2008 McGraw-Hill Ryerson Ltd., All Rights Reserved.
 LIABILITY FOR ACTS OF A PARTNER

Every partner is an agent of the firm who

can bind the firm in contract with third parties,
and who can create liability for the firm by
committing careless or improper acts

A partner is jointly and severally liable for

partnership losses

Because of this exposure to personal liability

for the conduct of another, partners should be
selected carefully

Fundamentals of Canadian Business Law, 2nd Canadian Edition Slide 1-17 © 2008 McGraw-Hill Ryerson Ltd., All Rights Reserved.
 RIGHTS AND DUTIES OF PARTNERS

Under partnership legislation, all property

and money brought into the partnership, as
well as any newly acquired property, is for the
benefit of the partnership

Partners owe a duty of utmost good faith to one

another

Partners must place the best interest of the

partnership above any personal interest,
render true accounts of money or information,
and avoid any competition with the firm
Fundamentals of Canadian Business Law, 2nd Canadian Edition Slide 1-19 © 2008 McGraw-Hill Ryerson Ltd., All Rights Reserved.
 DISSOLUTION OF A PARTNERSHIP

A partnership may be ended by giving

notice of a wish to dissolve, or if it is for a fixed
term, it will terminate automatically

A partnership may end if its purpose becomes

unlawful, or by the death, insolvency or
incapacity of a partner

If one partner’s behaviour is prejudicial to the

business, if there is a wilfull breach of contract,
or if a court finds a just and equitable reason to
do so, the partnership will be dissolved
Fundamentals of Canadian Business Law, 2nd Canadian Edition Slide 1-20 © 2008 McGraw-Hill Ryerson Ltd., All Rights Reserved.
 LIMITED PARTNERSHIPS

A limited partnership is a special form of

partnership requiring at least one general
partner but allowing one or more limited
partners

The liability for loss of a limited partner does

not extend beyond his or her capital
contribution; however, they may be deemed
general partners by a court if they participate
in the management of the business, place their
name on firm letterhead or include their name
in the name of the firm

Fundamentals of Canadian Business Law, 2nd Canadian Edition Slide 1-21 © 2008 McGraw-Hill Ryerson Ltd., All Rights Reserved.
 LIMITED LIABILITY PARTNERSHIPS

In a limited liability partnership (LLP), the

unlimited liability of each partner for the
general debt of the partnership is the same as
in a regular partnership, and each partner is
liable for his or her own negligence

The distinction arises from the fact that

individual partners are not liable for the
negligent acts of the other partners

Every partner must carry liability errors and

omissions insurance to cover him or herself
Fundamentals of Canadian Business Law, 2nd Canadian Edition Slide 1-22 © 2008 McGraw-Hill Ryerson Ltd., All Rights Reserved.
 REGISTRATION OF PARTNERSHIPS

Registration of partnerships is not

uniformly required across Canadian provinces
and territories, though most require it if the
partners are carrying on business under a
name other than their own

The declarations that are filed in specified

public offices contain the names and addresses
of the partners, the date the partnership came
into existence and a statement that each
partner is of the age of majority

Fundamentals of Canadian Business Law, 2nd Canadian Edition Slide 1-23 © 2008 McGraw-Hill Ryerson Ltd., All Rights Reserved.
 JOINT VENTURES

A joint venture is an utmost good faith

relationship arising by contract when two or
more businesses undertake a special project
together

The project is usually substantial, involving a

plan to combine the capital, equipment and
expertise of each for a specific time period

Once the joint venture is complete, there may

or may not be any ongoing relationship
contemplated between the companies
Fundamentals of Canadian Business Law, 2nd Canadian Edition Slide 1-24 © 2008 McGraw-Hill Ryerson Ltd., All Rights Reserved.
 SUMMARY

The sole proprietorship is informal and flexible,

allowing the individual owner to be responsive
to business opportunities

A partnership involves two or more persons

entering a business with a view to making a
profit, each being an agent of the partnership

Personal liability may arise for both sole

proprietors and partners, although limited
partnerships and limited liability partnerships
afford some degree of protection from liability
Fundamentals of Canadian Business Law, 2nd Canadian Edition Slide 1-26 © 2008 McGraw-Hill Ryerson Ltd., All Rights Reserved.