Introduction

• Author: J. Anthony VanDuzer
• 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 organization in Can-

ada: 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 di-

verse and overlapping ways — as employees, managers, customers,

creditors, and as investors. Although only some of us invest our money

directly in busine sses, almost all of us have some stake as investors. The

money we deposit in our bank accounts, the premiums we pay to our in-

surance companies, and our contributions to our pension funds are all

reinvested by these f‌in ancial intermediaries in business organizations.1

As investors and in our other relationships with business organi za-

tions, the main way busi ness organizations law affects us i s by allocating

the risks as sociated with carr ying on the business. Every busi ness carries

on a commercial activity t hat involves certain risks. Although the spe cif‌ic

sources of risk wil l vary from one business to the next, in every bus iness

the fundamental n ature of the risk is the same: Will the busi ness prosper

or fail? In general, each type of business organization str ikes a different

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

balance between the intere sts of investors and the others with a st ake

in the business, includi ng employees, managers, customers, creditors,

and the public, by establishing r ules that determine who benef‌its from

the success of the busines s and who is responsible for its losses. In this

regard, business organi zations law determines when ind ividual invest-

ors and business managers are personally liable for the debts and other

obligations of the business. To the extent that the law protects invest-

ors and managers from liabil ity for the obligations of a business, these

individuals should be encouraged to invest in st arting and car rying on

the business. Business organizations law also affects the risks incurred

by other stakeholders in their deal ings with a business by def‌ining who

is responsible for obligations the busines s owes to them and, as a res ult,

affecting the likelihood that those obligations will be fulf‌illed.

A second function of business organi zations law is to provide a

governance structure for the operation of busine sses. It deals with t he

rights and obligations of investors to manage the business themselves

and to monitor and control others who manage on their behal f. When

management acts in a man ner contrary to the best intere sts of the busi-

ness, it provides remedies to busine ss investors. In this way, business

organizations law addre sses the risk s that investors face as a result of

actions by man agers.

This book examine s the balance struck between the interest s of invest-

ors and other stakeholders in the sole proprietorship, the partnership, and

the corporation, and the part icular kind of organizat ional structure the

law provides for each form of business organi zation. Emphasis is placed

on the practical application of legal rules in an everyday context and the

role that lawyers play in adv ising their business clients about these r ules.

This chapter continues with an examination of the basic nature of

a business and the intere sts of its stakeholders, and then looks at the

essential elements of the law governing business organizations. Next,

the fundamental ch aracteristics of the sole proprietorship, the part ner-

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

business, such as joint ventures a nd franchises, are des cribed. Some of

the advantages and dis advantages of each are identif‌ied based on both

legal and practical considerations.

In the remainder of the book, par tnerships and corporations, re-

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

areas are covered:

• Crea tio n — How is the business organization formed?

• Internal Organization — What are the relationships among the people

who own and those who manage the business and how are they gov-

erne d?