Introduction

• Author: J. Anthony Vanduzer
• Pages: 1-24

CHAPTER

1

INTRODUCTION

A.

INTRODUCTION

TO

THIS

BOOK

This book provides

an

overview

of the

essential

features

of the law

gov-

erning

the

most common

forms

of

business organization

in

Canada:

the

sole proprietorship,

the

partnership,

and the

corporation.

It is

intended

to be an

accessible

and

practical

reference

for law and

busi-

ness students, lawyers, accountants,

and

others concerned with under-

standing business organizations.

The law

governing business organizations touches

all of us, in a

variety

of

diverse

and

overlapping ways

— as

employees, managers,

customers, creditors, and, most significantly, investors. Although only

some

of us

invest

our

money directly

in

businesses, almost

all of us

have

some stake

as

investors.

The

money

we

deposit

in our

bank

accounts,

the

premiums

we pay to our

insurance companies,

and our

contributions

to our

pension

funds

are all

reinvested

by

these

financial

intermediaries

in

businesses.1

As

investors

and in our

other relationships with business enterpris-

es,

the

main

way

business organizations

law

affects

us is by

allocating

the

risks associated with carrying

on the

business. Every business carries

on

a

commercial activity that involves certain risks. Although

the

specific

sources

of

risk

will vary

from

one

business

to the

next,

in

every

business

1

Some money deposited

in

bank

accounts

is not

invested

in

business,

but

loaned

to

consumers.

1

2 THE LAW OF

PARTNERSHIPS

AND

CORPORATIONS

the

fundamental

nature

of the

risk

is the

same: Will

the

business prosper

or

fail?

In

general, business organizations

law

strikes

a

balance between

the

interests

of

investors

and the

other stakeholders, including employ-

ees, managers, customers, creditors,

and the

public,

by

establishing rules

that

determine

who

benefits

from

the

success

of the

business

and who is

responsible

for its

losses.

In

this regard, business organizations

law

determines when individual investors

are

personally liable

for the

debts

and

other obligations

of the

business.

By

affecting

the

allocation

of the

risks

of

doing

business

in

this

way,

the law

governing

business

organiza-

tions

affects

the

incentives

for

entrepreneurs

to

engage

in

business.

It

also

affects

the

risks incurred

by

other stakeholders

in

their dealings

with businesses.

A

second

function

of

business organizations

law is to

provide

an

organizational structure

for the

operation

of

businesses.

This book examines

the

balance struck between

the

interests

of

investors

and

other stakeholders

in the

sole proprietorship,

the

part-

nership,

and the

corporation,

and the

particular kind

of

organizational

structure

the law

provides

for

each

form

of

business organization.

Emphasis

is

placed

on the

practical application

of

legal

rules

in an

everyday

context

and the

role that lawyers play

in

advising their busi-

ness clients about these rules.

This chapter continues with

an

examination

of the

basic nature

of

a

business

and the

interests

of its

stakeholders,

and

then looks

at the

essential elements

of the law

governing business organizations.

Next,

the

basic characteristics

of the

sole proprietorship,

the

partnership,

and

the

corporation,

as

well

as

some other methods

of

carrying

on

busi-

ness, such

as

joint ventures

and

franchises,

are

described. Some

of the

advantages

and

disadvantages

of

each

are

identified based

on

both

legal

and

practical considerations.

In the

remainder

of the

book, partnerships

and

corporations,

respectively,

are

addressed

in

detail.

In

relation

to

each,

the

following

areas

are

covered:

•

Creation

— How is the

business

organization

formed?

•

Internal

Organization

—

What

are the

relationships among

the

peo-

ple who own and

those

who

manage

the

business

and how are

they

governed?

•

External

Relationships

—

What

are the

relationships between

the

business

organization

and

those

it

deals with, such

as its

creditors,

customers,

and

tort2 victims,

and how are

they governed?

2

A

tort

is an act or

omission giving rise

to

civil

liability.

The

most common tort

is

negligence.

If a

person

can

prove that

the act or

omission

of

another meets

the