CHAPTER FOUR SOLE PROPRIETORSHIP
The sole proprietorship is the simplest form of “business association” we will examine. It is perhaps a bit odd to describe it as a form of “association” given that the “sole” proprietor will be the only “equity” investor and thus doesn’t “associate” with anyone else as a co-equity investor. However, there will almost invariably be “associations” that the sole proprietor will have in order to carry on the business. These can include associations with employees, agents, lenders (such as a bank) and trade creditors. This chapter looks at the structure of the sole proprietorship, its formation, legal status, name registration requirements, funding, management, and dissolution. It also briefly notes why one might want to use this form of business association to carry on a business.
Objectives: Closed Book Be able to: (i) Briefly describe the legal structure of the sole proprietorship. (ii) Explain the potential for the management structure to become quite complex.
The legal structure of the sole proprietorship is very simple. The sole proprietor owns the assets of the business and is the ultimate decision-maker. However, a sole proprietorship management structure can, in practice, be very complex. The sole proprietorship business could, at least theoretically, grow to become very large and the sole proprietor could hire several managers to manage various aspects of the business. Each of these managers might be given authority to engage others to assist in doing the required work. A quite complex hierarchy could develop. The apex of the hierarchy would, however, continue to be the sole proprietor (even though the sole proprietor’s decision-making capacity might, as we shall see, be constrained).
Notes on Business Associations © Mark Gillen FORMATION
Objective: Be able to explain how a sole proprietorship is formed.
The formation of a sole proprietorship is very simple. Other than complying with licencing requirements that may exist at federal, provincial or municipal levels for carrying on particular types of business, and the possible requirement for the registration of a business name, one simply starts carrying on the business. While there may be a requirement to register the business name, there is no requirement to register a sole proprietorship businesses.
LEGAL STATUS AND LIABILITY OF THE SOLE PROPRIETOR
Objectives: 1. Note the legal status of the sole proprietorship. 2. Note the legal consequences of that legal status in terms of: (i) who owns the assets of the business; (ii) who can be liable on contracts and in tort; and (iii) what assets can be obtained in the enforcement of judgments arising out of the conduct of the business.
A sole proprietorship is not a legally recognized separate entity. The business is not treated in law as separate from the sole proprietor. This has a number of important consequences. The assets of the business are owned directly by the sole proprietor. When contracts are entered into in respect of a sole proprietorship business the sole proprietor will be the contracting party. The business cannot be a party to any contract because it is not a legally recognized entity capable of entering into contracts. Thus the sole proprietor will be directly liable for the performance of the contracts. Torts committed in carrying on the business will be the torts of the sole proprietor either because of the sole proprietor’s direct involvement in the tort, or because the sole proprietor is vicariously liable for the acts of the agents and employees engaged for the purpose of carrying on the business. The business cannot be vicariously liable because it is not a legally recognized entity. Persons who obtain judgments against the sole proprietor based on claims arising out of the conduct of the business can satisfy those claims out of not just the assets of the business but also out of...
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