Business Law: Corporation, Agency and Franchising, Sole Proprietorships, Partnerships and Corporations

This document discusses the key differences between the company business structure and general partnership, ownership of the company, fiduciary duties of directors, agency relationship, franchising, and sole proprietorships, partnerships and corporations.

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The Corporation
Question 1
In order to highlight why incorporating the business is a superior idea in comparison to
general partnership, it is imperative to consider the key differences between the company
business structure and general partnership. It needs to be highlighted that incorporating the
business implies the decision to change the business structure from general partnership to
company structure. In the context of the situation at hand, two factors are particularly relevant
for choosing to make the shift to company. A key characteristic of company is that it has a
separate legal entity which is independent from the owners. This is not the case with regards
to general partnership whereby partners and firm are not different. Since the company has a
separate legal identity, hence the contractual relations for the business are enacted with the
company and not the promoters or shareholders. This results in limited liability for the
owners. This is desirable in the given case considering that the business is about to start on an
ambitious project which would require significant debt funding. Also, for the company
structure, it is easier to raise financial resources through transfer of equity. This option is not
permissible in general partnership where the firm would have to be dissolved. Hence, the
company structure would allow the business to raise capital for fulfilling the additional need
of $ 500,000 for the project.
Question 2
The ownership of the company is captured by the common stock. As a result, the extent of
ownership of a given shareholder is highlighted by the extent of common shares that are held
by that respective shareholder. In the given scenario, it is envisaged that the financial interest
of each of the partner should remain the same in the company as in the partnership business.
Thus, common shares for the total ownership of the company should be divided between the

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three promoters in the ratio of their holding in the partnership firm. This arrangement allows
the promoters of the company the flexibility to introduce new shareholders as and when
required either through the transfer of their shares or through the issuance of incremental
fresh equity. Based on the future fund raising arrangements, the equity stake of the three
promoters would automatically adjust reflecting their ownership coupled with voting rights.
These are pivotal as it is related to control and to provide strategic vision.
Question 3
It is imperative that the directors of the company are agents who tend to represent the
principal i.e. property. Considering the agency relationship, fiduciary duties arise for the
agents towards the principal. Based on common law, one of these duties is that the interest of
the principal must be placed superior to personal interest. Also, agents are expected to take
actions for the furtherance of interest of the principal. Clearly, Bob’s conduct is not
appropriate as he has violated his fiduciary duties towards the company. This is because his
duty was to find suitable property for development. However, when Bob did find such a land,
he made personal investment in the same and did not inform other directors about the same.
The right conduct would have been to bring to the notice of the directors and if the company
did not make the purchase, then Bob could have personally purchased it. With regards to the
sale proposal also, there is a conflict of interest on the part of Bob which has not been
disclosed to the other directors. This can potentially lead to losses to the company as it may
overpay for the land.
Question 4
It is possible for the company to remove directors but the same has to be approved by a
resolution supported by majority of shareholders. Also, reasonable opportunities ought to be
provided to the director whose removal is being considered so as to he/she can respond on the

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grounds for dismissal. For calling a shareholders’ meeting, a prior notice ought to be given
with a copy of the tentative agenda. In the given case also, a extraordinary general meeting
would be called with the underlying agenda of removal of Bob from the position of director
for the company. The directors (i.e. Charles and Jane) are expected to highlight the grounds
for dismissal of Bob from the directorship of the company. Bob is then presented with an
opportunity to present his defence. Finally, the voting on the proposal is done and if majority
of the shareholders pass the resolution, then the director would be removed. Bob in case of
unfair treatment being extended can approach the court for relief being a member of the
company.
Question 5
In order to avoid the problems that are currently being faced by Charles, Bob and Jane, it
would have been better if the suitable provisions would have been inserted in the Articles of
Incorporation. These could have highlighted the accepted means in order to deal with various
situations. Also, all the three promoters would have been bound by these provisions. Further,
it would have lowered the current ambiguity which is being faced with regards to the suitable
penal action for unauthorised actions such as those taken by Bob. Also, the grounds for
termination of directors should have been highlighted as part of the articles of incorporation
at the time of incorporation.
Agency and Franchising
Question 1
The agency relationship between the principal agent involves the agent representing the
principal within the scope of authority presented by the principal. One of the key elements of

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this relationship is the fiduciary nature considering that principal would be held liable for the
acts of the agent within the scope of authority. As a result, there is trust required in the
relationship as any misconduct on the part of the agent could have significant adverse impact
on the principal. In such a relationship, fiduciary duties are bestowed on the agent whereby
the conduct of the agent is such that the trust placed by the principal is not breached. This is
pivotal for this agency relationship as any doubts regarding the intention of the agent would
essentially terminate the relationship.
Question 2
With regards to scope of authority for the agent to act on the behalf of the principal, one of
the components is express authority which has been bestowed by the principal on the agent.
This essentially would refer to the authority that has been explicitly assigned to the agent
either through writing or oral conduct. However, the sphere of the authority for the agent also
comprises of one more element namely apparent authority. This refers to the authority that
exists even though the principal has not explicitly extended the same. This is linked to the
nature of responsibility that the agent is required to assume when acting on behalf of the
principal. Essentially, this is assumed to be possessed by the agent by the outside party with
whom the agent enacts contractual relations on behalf of principal.
Question 3
In a corporation, the directors and other employees are agents of the company since they
conduct business activities on behalf of the company. The company is a separate legal entity
but since it cannot execute the contracts, hence the employees have been hired in order to
enter contractual relationship with the third parties. With regards to partnership, each of the
partners tend to act both as principal and agent. This is because when one partner executes a
contract on behalf of the partnership firm, then essentially all the partners are liable for the

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contract. Thus, the partner who is executing the contract is the agent for all the absent
partners. The absent partners would be in the position of principal.
Question 4
One of the key advantages of expanding through franchising is the lowering of business risk.
This is because in franchising majority of the financial resources in the business would be
invested by the franchisee . Additionally, it allows for expansion of business even when the
business does not have significant amount of resources required for expansion. These may
not be limited to only financial and would include operational expertise also. Besides,
franchise based model offers a steady source of revenue to the franchisor not only in terms of
franchise fee but also a royalty on the revenues earned by the franchisee. Additionally, it
provides a means to quickly enhance the scale which otherwise would not be possible owing
to the sheer resource requirement.
Question 5
Usually arms length relationships do not have fiduciary duties but the relationship between
franchisor and franchisee is an exception to this trend. The key fiduciary duty of the
franchisee towards the franchisor is to ensure that no misconduct should be done which
potentially has adverse impact on the brand as it is key asset which the franchisor relies on.
Also, it is expected that the business would be run so that the interests of the franchisor are
safeguarded. The franchisor also has the fiduciary duty to offer reasonable business support
to the franchisee so that the business does not fail and prospers.
SOLE PROPRIETORSHIPS, PARTNERSHIPS AND CORPORATIONS
Question 1

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The decision to choose the partnership business structure seems correct as company structure
would not be suitable at the given stage. This is because there would be too many legal
requirements to fulfil to form a company along with reporting requirements which can be
bypassed by choosing the partnership structure. Also, the nature of the business does not
seem to be one where there would be significant amount of money required. Hence even in
case of expansion, significant financial resources would not be required which makes
partnership preferable to a company structure.
Question 2
1) Ownership, control and business formation: In these aspects, a partnership business
structure is preferred, This is because a partnership firm can easily be established on the
basis of the a partnership agreement. Also, since there are only two partners, hence, the
control and ownership would belong to these two in accordance with the details outlined
in the partnership agreement. The current partnership would need to be dissolved if there
is any change in ownership but it is unlikely that such a requirement would arise.
2) Financing: A key disadvantage with partnership structure is that raising incremental
financial resources can be difficult as the ownership cannot be readily transferred without
dissolution of existing partnership. However, it does not seem to be a concern in the
current case as the business is essentially service based and thereby is not capital intensive.
Small capital would be required to start the business in terms of tattoo related equipment
and premises. After the start of business, only working capital needs would arise which
can be met through customer revenues.
3) Liability: A key disadvantage with partnership is that the partners would be personally
liable for any business liabilities. In case of partnership, these would be unlimited.
Although there are structures within partnership, that limit the liability but those are not an
option in this case. The best recourse to this potential issue is that the partners be careful

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with regards to tattooing so that no physical harm is caused to the customer as it could
result in sizable liability for the partners.
4) Profit: With regards to the profit distribution amongst partners, the partnership agreement
is pivotal since it highlights the precise division of the same. This is not an issue as the
sharing of profit is mutually decided by the partners taking into consideration the amount
of capital investment, expertise and time for running the business. If there are potential
issues regarding this aspect, then a new partnership agreement may be formed reflecting
the new arrangement.
5) Income taxation of profit: The partnership acts as a pass through mechanism which
implies that the profits made by the business are taxed at the end of the partners and
personal income tax would be levied on them. This can potentially be disadvantages since
the corporate tax rate prevalent in Canada meant for companies is lower than the highest
marginal tax rate for individuals. However, considering that the business is only being
started, it is highly likely that personal tax rate applicable in this case would be
comparable to corporate tax rate.
6) Continuity: The key disadvantage in this regards is that the ownership of the business
cannot be transferred without dissolution of partnership. As a result, if a partner dies, then
the partnership firm is automatically dissolved as it does not have a legal existence
independent of the partners. However, for the partners, this is not an immediate concern
and if there business grows, they can form a company thereby ensuring continuity.
Sole Proprietorship
Question 1
It is evident that Charles intends to operate the sole proprietorship not in his own name but
rather the name of a firm. It is imperative that the name must be available i.e. not taken by

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another business. The business along with the name would need to be registered in the
provinces where Charles intends to do business. Also, a federal business number is required
which may be automatic in some states when registration is carried out. However, in certain
states separate application for this number ought to be filed.
Question 2
One of the advantages of operating the business as sole proprietorship is that there is no profit
sharing and hence all the profits are retained by the sole owner i.e. Charles. Also, there is
complete control over the business considering sole ownership leading to no interference
from other owners. Another advantage of sole proprietorship is in the form of minimal
formalities required for the commencement of the business. Additionally, unlike the company
structure where there is immense regulatory oversight and various regulatory requirements on
an ongoing basis, this is not the case with sole proprietorship. As a result, the overhead
compliance costs for Charles would be minimal.
Question 3
One of the key disadvantages is that all the major decisions would have to be taken by the
owner (Charles) and there is limited help in decision making. Another disadvantage is with
regards to raising financial resources where equity dilution is not possible. Also, raising debt
is possible to a certain limit. Hence, in case of future funding for expansion or working
capital, Charles would have to arrange this on his own. The tax treatment of the profits can
potentially be an issue especially if a high income is generated. This is because the income
would be taxed at personal income tax rate. The biggest disadvantage is unlimited personal
liability on part of Charles for business liabilities.