Feb. 4, 2026 - Business Org, Agency

Liability

A debt or obligation. A right that is recognized by law that can be enforced by a person, by a court process, that can result in a court ordered remedy.

• It is commonly money, however it can be other remedies as well.

• Major forms of business are concerned with legal liability.

Steps in a Legal Risk Management Plan (5 Steps)

APDIR

1. AUDIT of potential liabilities: Interaction that business has with outside organizations or persons.

2. PRIORITIZE the risks identified in terms of likelihood and potential result.

3. DEVELOP strategies to deal with each risk: Prevent legal liabilities from crystalizing and minimize consequences if it does crystalize.

   • Avoid the risk

   • Reduce the risk: Quality control issues.

   • Transfer the risk: Another party or insurer.

   • Absorb the risk: Minimize the risk.

4. IMPLEMENT the plan.

5. REVISE the plan regularly and update with new risks.

Sole Proprietorships

• Not a legal entity separate from its owner and consequently limited liability does not exist.

• A consequence of the separate entity principle. They have unlimited liability, which can be dangerous.

• Income is added to the income of the sole proprietor for income tax purposes.

• Directly and personally liable for all the business liabilities of the sole proprietorship contractual or otherwise.

  • All business and personal assets of the sole proprietor can be seized in fulfillment of the sole proprietorship business obligations and liabilities.

  • Personally responsible for all employee actions (vicarious liability).

• The most common and simplest form of business entity, easy to set up and dissolve.

Vicarious Liability

Liability created by the employees. Applies wherever there is an employer–employee relationship and actions occur within the scope of employment. Sole proprietors are full responsible for this.

• Insurance can be sought to reduce this risk.

• Example: Employers may be liable for workplace accidents caused by employees. Particularly important due to safety risks. Worker negligence causes injury, the company may be liable.

Advantages of Sole Proprietorship

• Ability to make all business decisions.

• Right to all profits.

• Right to deal with all assets without interference.

• Simple to set up, very inexpensive.

  • Only have to register business name in companies office and pay fee to open.

• Easy to dissolve.

Disadvantage of Sole Proprietorship

• Unlimited Liability: Sole proprietor is liable for all the liabilities of the business and all non-business assets are exposed to creditors of the business.

  • This is the most dangerous form of liability, as personal assets such as cars, houses, collections and personal items can be seized.

• Responsible for all employee actions (various liability).

• Because the owner and the business are the same legal entity, the business itself dies with the owner.

  • Assets and liabilities become a part of the owner’s estate.

  • There is no separate legal existence to continue operating.

Prophylactic (Preventative) Actions to Protect Yourself

(I-CPA-BRP)

1. Get insurance (property and negligence). This is the best way to protect yourself.

2. Credit proof assets, which can be done through investing in RRSPs, and Individual Pension Plans.

3. Business and real estate plan to redistribute property (before going into business).

   • Transfer assets to other individuals if it is desirable.

   • Make an absolute transfer before going into business.

   • If you go bankrupt, trustee can review transactions for up to 5 years. Not recommended to transfer to parents, or spouses.

Importance of Prenups

A prenup determines the allocation of property and support payments in the event of divorce. Someone maybe able to get %50 of all property.

• Don’t transfer to the spouse because in the case of a separation the spouse can take it.

• Certain things aren’t divisible in marriage; property acquired prior to the marriage (only the incremental amount) or property acquire through inheritance.

• Property exempt from the division in the marriage act would be dangerous to transfer to the spouse. Spouse could now get this property during the separation, whereas before it would have all been yours.

• Prenups undermines protection from creditors.

  • So you should probably do a combination of all possibilities.

Family Property Act Time Frame

Federally

Extends to cohabitants of 3 years with conjugal relations.

What is a Trust

A legal arrangement where one person holds and manages property for the benefit of someone else. This includes a Settlor / Grantor (person who creates the trust), a Trustee (person or institution managing the asset), and a Beneficiary (person receiving what is in the trust)

• A settlor transfers property to a trustee.

• The trustee manages the property. For the benefit of beneficiaries, until they are designated to receive it. The trustee must act within the best interests of the beneficiary.

  • A beneficiary receives the money when the terms of the trust indicates they are able to.

Trusts are commonly used for estate planning, tax planning, asset protection and transferring things to family members (e.g. property, money, etc.).

Problems with a Trust

• Extremely high maintenance costs (legal fees, accounting fees, trustee fees, administrative costs).

  • Taxed at the top marginal personal tax rate on income they retain (even $1 of undistributed income can be taxed at the highest rate).

• Beneficiaries have to report the income on their own tax returns, they are taxed at their personal tax rates.

  • This can lead to high tax bills during tax time.

• Complex tax rules associated with a trust.

Two Main Types of Trust (IT)

Inter Vivos Trust (Living Trust): Created while the settlor is alive. It is used for estate planning, income splitting, and asset protection.

• Features include: Subject to top marginal tax rate on retained income, ongoing management during the settlor’s lifetime.

Testamentary Trust: Created through a will, after someone dies. It is used to manage inheritance for children or dependents, provide long-term control over assets, historically had tax advantages (some reduced over time).

• It can be useful for creditor protection, controlled distributions, planning for minors or vulnerable beneficiaries.

Co-operatives

They are designed to provide their members with good or services at a cost lower than the cost of similar goods and services in the marketplace.

Some maximize returns to the members. It is essentially about eliminating the middle-men (brokers) within the economy.

• Sell products directly to the consumer as much as possible.

• Created because farmers and rural residents in the prairies were forced to pay high prices of the goods and services from the only producers from Ontario.

• Control of the organization is related to the quantum of investment and is designed for profit maximization for members.

•  Examples include all credit unions, Mountain Equipment co-op, Red River Co-op.

Principles of Co-operatives (4 Principles)

• One vote: Everyone gets one vote, no matter how much money they put in.

• No proxy: You have to show up in person to vote, you can’t have someone vote for you.

• No fixed return: You’re not guaranteed a set profit just for investing money.

• Usage of profits: Extra profits are shared based on how much you use the co-op (buy/sell through it), not how much you invested.

Agent

Someone who is authorized to act on behalf of another person (the principal) and can make deals or contracts for them. Normally, there is an agreement creating an agent, but sometimes if there is not an agreement someone can be an Agent by Estoppels.

• Not real agents: real estate agent, sports agent, fashion agency; they are just representatives.

  • To be a true agent you need to be able to sign contracts on behalf of the principal.

• Real Agents: Stock broker, lawyers, a person can get the power of attorney.

Principal

The person (or business) who gives another person the power to act on their behalf (the agent). The boss/decision-maker who authorizes an agent to make deals, sign contracts, buy or sell things, represent them in business dealings.

Whatever the agent does within their authority, legally counts as if the principal did it themselves.

• Principal hires the agent and sets rules/limits on what they can do.

• The agent makes a contract with someone else (a customer, company, etc.) on behalf of the principal.

• If the agent follows the rules, the contract is really between the principal and the third party. The principal is legally responsible, not the agent.

• An example is a stock broker, a corporation authorizes an employee to sign contracts with vendors, a restaurant owner authorizes a head chef to purchase food supplies.

Agent by Estoppels

If you make it seem like someone is your agent, and another person reasonably believes that and relies on it, you can still be legally responsible, even if you never officially made them your agent.

• If your actions lead others to believe someone represents you, the law may treat them as if they actually do.

• You can be treated like a partner even if you never signed an agreement, if your behavior makes it look like you are one.

• Estoppel: A legal barrier (you cannot later say that someone was not your agent if it appeared as such).

Two Main Forms of Estoppels (AA/HO)

Apparent Authority: The person appears to have authority because of past dealings or common business practices. The appearance comes from how things usually operate, not from a direct statement. An appearance was created that an agent had authority on behalf of the principal.

Holding Out: The principal represents someone as their agent (by words, conduct or by failing to correct the situation).

Two common ways:

• The principal says: “This person handles contracts for me.”

• The person claims they are an agent and the principal knows, but does nothing to stop it.

Example:

• Someone tells customers: “I work for her company.”

• The owner hears this and says nothing.

• A customer signs a contract.

The Agency Principle

If a reasonable person would think the agent was acting with the principal’s authority, then the principal is legally bound by what the agent did.

• Courts look at this using a practical, common-sense approach. They ask whether it was reasonable for the third party to think the person was an agent.

Agent by Necessity

When the agent enters into contracts with a third party for the benefit of the principal without the consent of the principal. This do this out of necessity for the principal specifically to limit losses that the principal could experience. In emergencies, an agent may make necessary contracts without permission to protect the principal from greater loss.

• Exists in limited cases such as salvaging goods in a supply chain.

Termination of Agency

If an agency agreement does not say how long it lasts, then either the principal or the agent can end it, as long as they give notice. This means that the relationship is not permanent.

• You don’t need a special reason (unless the contract says so).

• You must give reasonable notice.

• Once notice is given, the agency relationship ends.

Agency Law

Contract between the principle and its agent, according to which the principal is hired and authorized the agent to enter into contracts with third parties in the principals name.

• They are created by getting into a contract, either by verbal or written, and clearly define the boundaries of the agency, the matter to which the agent can bind the principal, and what kind of contracts can they make.

• Remuneration (payment) for the agent: The payment terms are usually stated in the contract.

Power of Attorney

Happens when someone is chosen to do the bidding of a person incapable to carry out day to day legal tasks (e.g. mentally incapacitated).

• They get the power of agency which is general or limited, that is determined by statutes.

• The agent should be acting in the best interest of the donor while taking care of issues.

• Examples include for Elderly people, people with mental illness, or those unable to make their own decisions for other reasons.

Ratification

Happens when an agent goes beyond their authority, but the principal later approves the contract anyway. When the principal approves it, the contract becomes valid, as if the agent had authority from the start.

• Agent makes a contract they were not liable to make but the principal is not automatically liable.

• Principle can approve (ratify) the contract, or refuse to approve (ratify).

  • If approved the contract it becomes legally binding, and the principal is now liable.

  • If not approved, the principal is NOT bound, the agent (called a pseudo-agent) may be personally liable, and the third party may sue the agent.

Duties of the Agent (4 Duties)

(FC-BD-DOC-PP-FD)

• Follow the agency contract: If the agent doesn’t follow it, they may be personally responsible.

• Be diligent: The agent must work carefully and responsibly.

• Duty of care: Even if unpaid, the agent must act carefully and wisely.

• Personal performance: The agent can’t pass their tasks to someone else unless allowed.

• Fiduciary duty: The agent must act in the best interest of the principal, being honest and loyal.

Fiduciary Duty Meaning

A fiduciary is someone who has agreed to act for another person’s benefit, not their own.

They must:

• Be loyal.

• Act in good faith.

• Be honest and open (candid).

• Put the other person’s interests first.

A trustee is a classic example of a fiduciary. An agent is also a fiduciary because they act on behalf of a principal and must stay loyal to them.

Fiduciary Duties

(PP / DBF)

1. Personal Performance: The agent must do the job themselves. Can’t pass it off to someone else unless the principal allows it.

2. Duty of Bona Fides (Good Faith): The agent must act honestly and in the principal’s best interests, and avoid conflicts of interest. This means that the agent cannot:

   1. Take secret commissions or bribes.

   2. Take business opportunities that belong to the principal (unless the principal gives permission).

   3. Represent both the principal and a third party in the same deal without permission.

Duties of the Principal to Agent

(R / RE)

The principal must:

1. Pay the agent (Remuneration): If payment is written in the contract, the principal must pay that amount.

   • If no amount is agreed on, the agent is entitled to a reasonable fee (called quantum meruit).

   • Quatum meruit: Means as much as you deserve. Being paid a fair amount for the work that you did.

2. Reimburse expenses: The principal must repay the agent for reasonable expenses they incurred while doing their job.

Reasonable Person Test

This is an objective test based on a standard person. Courts asking “What would a normal, careful and sensible person have done in the same situation?” Used to decide whether someone acted negligently or reasonably.

• The court compares a person’s behavior to how an average, ordinary person would have acted, not a perfect person, and not someone careless.

• It’s commonly used in negligence cases (like accidents or injury claims).

• If someone falls below what a reasonable person would have done, they may be found liable.

Limited Partnership

A partnership with general partners who run the business and have full liability, and limited partners who just invest money and have limited liability. A limited partnership (LP) is different from a regular partnership because of its structure.

There are two types of partners:

1. General partner: Has unlimited liability and usually runs the business and signs contracts.

2. Limited partner: Has limited liability (only loses what they invested), usually doesn’t manage, and just contributes capital. If a limited partner starts managing the business, they can become like a general partner and take on full liability.

Limited partnerships are less common now because the tax advantages were removed in the early 1990s.

Limited Liability Partnership

(Different From Limited Partnership)

This is about protecting innocent partners in certain professional partnerships. If a partner makes a mistake, is negligent, or does something wrong, other partners are not personally responsible for it, as long as they were not involved.

• Partners are not liable for:

  • Another partner’s professional mistakes

  • Partnership debts

  • Other partners’ obligations or misconduct

• This is used for professions like:

  • Lawyers

  • Chartered accountants

  • Certified general accountants

The protection keeps an innocent partner’s personal assets safe from claims caused by others’ professional errors.

Partnership Amendment Act

LLPs are created and regulated by law to give partners in certain professions (like lawyers and accountants) protection from personal liability. Before LLPs, in a general partnership:

• Every partner had unlimited personal liability.

• Partners could be personally sued for mistakes of other partners (“joint and several liability”).

• The law changed to protect partners from this kind of liability.

• The legislation came into effect on February 25, 2003, officially codifying LLPs in law.

Prior LLPs were dealing with serious problems when large law and accounting firms faced massive lawsuits. Some firms collapsed because innocent partners were sued for high amounts.

Cons of Partnership

LLPs does reduce risk, however, it does not completely take the risk away.

• Protection is not guaranteed: Liability protection is lost if, you knew about the negligence before it happened and did nothing. Or the negligence was committed by someone you directly supervised.

• It is only a partial shield: Individuals are protected from other partners’ negligence, but not protected from contractual or trade debts.

  • Only Saskatchewan has a full shield.

• Protection only covers personal assets: Business assets can still be used to satisfy debts. Creditors can still claim against the partnership itself.

  • Partner’s interests, partnership assets, and insurance can be claimed against.

• Risk depends on partners: Financial safety depends on your partners. If they are reckless or less financially stable, it can impact you.

Pros of a Partnership

• Easy to set up: Partnerships are simple and inexpensive to start compared to corporations.

• Shared resources and skills: Can combine money, skills, and expertise, making the business stronger.

• Shared decision-making: Share management and responsibilities, so one person doesn’t have to do everything.

• Flexibility: Less regulated than corporations and can adapt quickly.

• Profit sharing: Profits are shared among partners, which can be motivating.

• Tax benefits (sometimes): In general partnerships, profits are taxed only once at the partner level, not at the business level (unlike a corporation).

Corporation

A corporation is a separate legal person from the people who own it (the shareholders). Because it is a separate legal entity, it can sue and be sued in its own name.

• A corporation is an artificial person, it’s not a real human. So it must act through people like a board of directors and managers (agents).

• Because humans act on its behalf, agency law applies (the legal rules about one person acting for another).

• The shareholders (investors) are not personally responsible for the corporation’s debts or wrongdoing (limited liability).

• If the corporation gets sued, the owners usually don’t lose their personal money, only what they invested.

Separate Entity Principle (Corporation)

A corporation is a separate person from the investors (investor shareholders) so, the investors are not responsible for the actions of the corporation. This gives limited liability to the shareholders. The investors can't be sued.

• This is because corporations have a separate existence, they are separate legal entities and are legal persons.

8 Characteristics of a Corporation

(LL-TA-M-TO-CE-F-L-S)

1. Limited liability: Personification of a business, making it a popular choice . A shareholder is not responsible to lose his or her investment.

2. Tax advantages: Can help reduce taxes, split income with family, grow money at a lower tax rate, and create tax advantages for selling the business or passing it to your children.

3. Management: Shareholders can elect the board of directors.

4. Transfer of ownership: In a partnership, ownership is tied closely to the people involved. In a corporation, ownership is tied to shares (stock), not the person.

5. Continuous existence: Lives on when someone dies.

6. Fidelity: Acting in good faith.

7. Loyalty: Do not owe loyalty to anyone that owns shares, like in a partnership. Shareholders can be involved in competing businesses.

8. Separation of ownership and management: Related to small and large businesses, shotgun clause, and oppression of the minority of shareholders.

Limited Liability

Various Characteristics of a Corporation

The most important feature of a corporation is that it is a separate legal entity. This means shareholders are only at risk of losing the money they invested, they are not personally liable for the company’s debts.

• This protects shareholders’ personal assets, they can only lose what they invest.

• Being able to incorporate easily and have limited liability has encouraged investment and led to major economic growth, almost like the Industrial Revolution.

  • Shareholders can invest without fear of losing more than their investment.

7 Tax Advantages for a Corporation

Various Characteristics of a Corporation

1. Income splitting: Can pay a salary to your spouse or children through the corporation, which may lower the overall family tax bill.

2. Dividend sprinkling: Can pay dividends to family members in lower tax brackets so they pay less tax on that income.

3. Small Business Tax Deduction: In Manitoba, small businesses pay a low corporate tax rate (around 10% on income under $500,000). This saves money if profits stay in the company and are reinvested.

4. Lower tax on dividends: Dividends are taxed more favourably than regular salary income.

5. Capital gains exemption: When you sell shares of your corporation, the first $750,000 of profit may be tax-free (if eligible).

6. Estate freeze: Can transfer future growth of the company to your children without triggering immediate taxes. Succession planning can pass the business on to family members, before the owner dies.

7. Independent pension plan: Corporations can set up special pension plans that may allow you to save more for retirement than normal RRSP limits.

There are many tax advantages available, these are only a few of them.

Management

Various Characteristics of a Corporation

Management is how the business is run, usually by a board of directors and executives, separate from the shareholders who own it.

• A partnership is unsuitable for a situation with a lot of investors. Shareholders on the other hand have no authority to participate in management.

• Their essential right is to elect the board of directors once a year.

Transfer of Ownership

Various Characteristics of a Corporation

In a corporation, ownership is easy to transfer because you just sell your shares, you don’t have to renegotiate the entire business relationship like you often do in a partnership. In a partnership, it is harder to transfer ownership to someone lese. The other partners must approve, and you cannot just sell your ownership to someone else.

In a corporation:

• Ownership is divided into shares of stock.

• Shareholders own shares, not the business directly.

• If a shareholder wants to leave, they simply:

  • Sell their shares.

  • The buyer becomes the new shareholder.

• The corporation itself continues unchanged.

• No one needs to rewrite the company structure.

Your relationship with the corporation ends when you sell your shares.

Continuous Existence

Various Characteristics of a Corporation

A corporation is considered an “artificial legal person.” That means the law treats it like its own separate entity.

• It can exist forever.

• If an owner (shareholder) dies, the corporation does NOT end.

• Shares simply transfer to someone else. The business continues normally.

• However, the corporation must file required documents, pay annual government fees, and follow corporate regulations to exist.

This creates stability and certainty. The business doesn’t depend on specific people staying alive or involved.

Fidelity (Fiduciary Duty)

Various Characteristics of a Corporation

“Fidelity” basically means acting in good faith and honesty. In a corporation:

• Directors and officers owe fiduciary duties to the corporation.

• Shareholders generally do NOT owe fiduciary duties just for owning shares.

• Managers must act in the corporation’s best interest.

• Regular shareholders just invest, they don’t manage.

Loyalty

Various Characteristics of a Corporation

In a partnership, partners cannot compete with the partnership. They owe each other loyalty because they are fiduciaries.

In a corporation shareholders:

• Do not owe loyalty just because they own shares.

• Can own shares in competing corporations (invest where they want).

  • Shareholders are investors, they do not manage the company or owe loyalty.

• Directors and officers DO owe a duty of loyalty.

  • They cannot steal corporate opportunities.

  • They cannot compete against the corporation they manage.

Separation of Ownership and Management

(Small Corporations)

Various Characteristics of a Corporation

Two types of organizations: Small companies and large companies. Depending on the type, it will affect the type of ownership, and management disputes.

• Small companies: Not publicly traded. They are exempt from the securities regulation that apply to publicly traded companies. Owners are often actively involved in managing or working in the business. Ownership and management are combined.

  • Includes “oppression of the minority of shareholders.”

Oppression of Minority Shareholders - Small Corporation

Separation of Ownership and Management

Various Characteristics of a Corporation

The biggest issue in small corporations is protecting minority shareholders (owners with a small percentage).

A minority shareholder can become:

• “Locked in”: They can’t easily sell their shares.

• “Frozen out”: They have little or no control over decisions.

This happens because:

• No one wants to buy minority shares because they come with no power. So the only way to sell is often at a very discounted price (way less than they initially paid).

• However, this can be addressed through the Shotgun Clause in a shareholder agreement.

Shotgun Clause - Small Corporation

Separation of Ownership and Management

Various Characteristics of a Corporation

A Shot Gun Clause is laid out in a Shareholders’ Agreement (a contract between the shareholders). This encourages fairness because the offering partner has to pick a price they’re willing to sell at or buy at themselves.

• One partner offers to buy the other’s shares at a set price per share.

• The other partner must either:

  • Sell their shares at that price, or

  • Buy the first partner’s shares at the same price

• This forces a quick resolution because neither partner can take advantage unfairly.

• This is common in private small businesses where there are only a few shareholders.

Disadvantages of the Shotgun Clause - Small Corporation

Separation of Ownership and Management

Various Characteristics of a Corporation

However, this clause may not always encourage fairness. If one shareholder doesn’t have enough money (is undercapitalized):

• They realistically can’t buy.

• They may be forced to sell.

In those situations:

• A third party may determine the fair price per share to protect the weaker party.

• This ensures that the undercapitalized will be considered.

Piercing the Corporate Veil

Limitation on the Separate Entity Principle

Normally, a corporation is completely separate from its shareholders, and shareholders only risk what they invest (as confirmed in Salomon’s case). However, courts may pierce the corporate veil in special situations. This can occur in situations related to:

1. Taxation situations (Statutory piercing): Corporation save tax up to a point. The government prevents abuse by connecting related corporations and enforcing personal tax when money is withdrawn.

2. Residence of corporation: May be taxed based on where the controlling shareholders live. Not just where the corporation was formed.

3. Agency situations: If corporation is acting on shareholders behalf, then shareholder may be responsible. Clear written agreement showing agency.

4. Fraud: Courts refuse to let the corporate structure to be created to commit fraud.

Separate Entity Principle (Basic Rule)

A corporation is legally separate from its shareholders. This was strongly confirmed in Salomon v A Salomon & Co Ltd.

• The corporation is its own legal person.

• Shareholders are not personally responsible for corporate debts.

• A shareholder can only lose what they invested.

• Courts usually respect this rule because it promotes business growth and prosperity.

How Judges Find that Partnerships Exist

1. Agreement (Even if not written): Some form of agreement, or implied from conduct. The court looks at what the parties actually did.

2. Is there a “Business”: A partnership must involve carrying on a business. Must look like an actual business operation.

3. Other supporting factors: Additional evidence that exists of profit sharing (contribution of capital, active role in business, ongoing business).

Judges look at the real elements of a relationship, not just what the parties call it. If a partnership is found to exist, the parties can be personally liable for debts and obligations.

Separation of Ownership and Management

(Large Corporations)

Various Characteristics of a Corporation

Two types of organizations: Small companies and large companies. Depending on the type, it will affect the type of ownership, and management disputes.

• Large companies: Publicly traded, people can buy shares on the stock market. Owners (shareholders), do not run the company. Professional managers are hired to operate it. There is a separation between ownership and management. More complex business model.

  • There can be a rivalry between shareholders and managers. This is because executive compensation effects the amount shareholders get.