Introduction

• Author: J. Anthony VanDuzer
• Profession: Faculty of Law University of Ottawa
• Pages: 1-27

1

CHA PTER 1

INTRODUCTION

A. INTRODUCTION TO THIS BOOK

This book provides an overview of the essential features of the law

governing the most common forms of business organi zation in Can-

ada: the sole proprietorship, the partnership, and the cor poration. It is

intended to be an accessible and practical reference for law and busi-

ness students, lawyers, accountant s, and others concerned with under-

standing business organizations.

The law governing business organizations touches all of us, i n

diverse and overlapping ways — as employees, managers, cu stomers,

creditors, and, most signif‌ic antly, as investors. Although only some of

us invest our money directly in busine sses, almost all of us h ave 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 fund s are all reinvested by these f‌inanci al intermedi ar-

ies in business organizations.1

As investors and in our other relationships w ith business enter-

prises, the main way business organizat ions law affects us is by allocat-

ing the risks associ ated with carrying on the busines s. Every business

carries on a commercial activity that involves certain ri sks. Alt hough

the specif‌ic sources of ri sk will vary from one business to the next, in

1 Some money deposited in b ank accounts is not invested i n business, but loaned

to consumers.

THE LAW OF PARTNERSHIPS AND COR PORATIONS2

every business t he fundamental nature of the risk is the same: Will

the busi ness prosper or fail? In general, each type of busine ss organ-

izations strikes a different bala nce between the interests of investors

and the others with a stake in the business, including employees, man-

agers, customers, creditors, and the public, by establishing rules that

determine who benef‌its from the success of t he business and who i s

responsible for its losses. In this regard, busines s organizations law

determines when individual investors and business managers a re per-

sonally liable for the debts and other obligations of the business. To the

extent that the law protects i nvestors and managers from liability for

the obligations of a business, these indiv iduals will be encouraged to

invest in starting and carrying on the business. Business organizations

law also affects the risk s incurred by other stakeholders in their deal-

ings with a business by def‌ining who is res ponsible for obligations the

business owes to stakeholders and, as a re sult, affecting t he likelihood

that those obligations wi ll be fulf‌illed.

A second function of business organizations law is to provide a

governance structure for the operation of bu sinesses. It deals with the

rights and obligations of owners to manage t he business themselves

and to monitor and control others who manage on their beha lf. When

management acts in a manner contrary to the best interests of the busi-

ness, it provides remedies to business owners. In this way, business

organizations law addresses the risks th at business owners face as a

result of actions by managers.

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 particula r kind of organizational

structure the law provides for each form of business organization. Em-

phasis is placed on t he practical application of legal r ules in an every-

day context and the role that law yers play in advising their business

clients about these rules.

This chapter continues with an examination of t he basic nature of

a business and the interests of its stakeholders, a nd then looks at the

essential elements of the law governing business organ izations. Next,

the fundamental characteristics of the sole proprietorship, the partner-

ship, and the corporation, as well as some other methods of carrying on

business, such as joint ventures and f ranchises, are de scribed. Some of

the advantages and disadvantages of each are identif‌ied based on both

legal and practical considerations.

In t he remainder of t he b ook, partnerships and corporations, re-

spectively, are addressed in detail. In rel ation to each, the following

areas are covered: