Sole Proprietorships and Partnerships

Flashcards about Week 2 lecture notes covering sole proprietorships and partnerships, focusing on their legal aspects within South African corporate law.

What are the primary sources of South African Corporate Law?

Common Law, Close Corporations Act 69 of 1984, Companies Act 61 of 1973, Companies Act 71 of 2008.

What are the main forms of business entities in South Africa?

Sole proprietorships, partnerships, close corporations, and companies.

What is a sole proprietorship?

A business owned and run by one person where there is no legal distinction between the owner and the business.

What is a key disadvantage of a sole proprietorship concerning liability?

The owner has unlimited liability, meaning personal assets are at risk.

What is a partnership?

A legal relationship arising from an agreement between two or more people, not exceeding 20, contractually bound to operate a business.

What are the essential legal characteristics of a partnership?

Mutual agreement, joint ownership, and profit-sharing.

What are the 'essentialia' (essential elements) of a partnership?

Contribution, lawful purpose, joint benefit, and profit-sharing.

What are the fiduciary duties between partners?

The partners have a duty to act in good faith toward one another.

What is the principle of joint and several liability in partnerships?

Each partner can be held liable for the entirety of the partnership's debts.

What are some legal grounds for the dissolution of a partnership?

Lapse of time, completion of partnership business, agreement, change of membership, death, or court order.

How does a court determine the existence and validity of partnerships in the absence of a formal agreement?

Through implied agreements, assessing the conduct of the parties and the presence of essentialia.

How does English law influence South African corporate law?

Many principles of English law have been incorporated into South African law.

Under the Companies Act 71 of 2008, what categories of companies are there?

Profit companies, Nonprofit companies, state-owned companies, and personal liability companies

What are the potential consequences for a sole proprietor when the business becomes insolvent?

The estate of the proprietor may also be sequestrated

What is the 'substance versus form' test used for in the context of a sole proprietorship?

A court will look at the true substance of the arrangements between the owner and employees to decide if the employees have become part-owners.

What are the disadvantages of a sole proprietorship?

No 'limited liability', No 'perpetual succession', Limited access to capital, Cannot accommodate more than one person, Sole proprietor will seldom have all the business skills.

Define a partnership according to Pezzutto v Dreyer 1992 (3) SA 379 (A).

A legal relationship created by contract between two or more persons, where each agrees to contribute to the partnership business, carried on for joint benefit, with the object of making a profit.

What does it mean that a partnership is not a separate legal entity?

The rights of a partnership are vested in, and the liabilities are binding on, the individual partners

How can an agreement in a partnership be constituted?

Expressly, impliedly or tacitly.

What is the maximum number of people a partnership can have according to the Companies Act 61 of 1973?

Twenty

What is the nature of contribution to a partnership?

Parties must agree on anything that occupies the time and labour of a person for profit and must be placed at the disposal of a partnership and subjected to the risks of the business. Contribution may be in money, labour, property or skills.

In Issacs v Issacs 1949 (1) SA 952 (C), what are essentials of a partnership?

Each partner must bring something into the partnership, business should be carried on for joint benefit, object should be to make a profit, and the contract should be a legitimate contract.

What is expected from Partners given their 'principals' status?

• Partners must not act independently.
• Partners are principals of a partnership.
• The benefit does not have to be equal, however. Therefore a partner, when acting on behalf if the partnership, he does not only act as a representative but he is also involved as a principal.

How are partnerships formed?

There are no formalities for the establishment of a partnership, so it comes into existence once the potential partners have an express or implied agreement between them which contain the essentialia of a partnership.

How is an anonymous partnership created?

Where parties agree to share the profits of a business which is to be carried on by one or more of the partners in his or their name while partners whose names are not disclosed remain anonymous partners.

What is unique to a partnership en commandite?

This partner has all the characteristics of the anonymous partner, but in addition is only liable to his fellow partners for debts up to the amount of his agreed contribution.

Internally, how are parnership relationships regulated?

The internal relationships of partners is usually regulated by a partnership agreement, where the partners set out the extent of their rights and responsibilities, subject to parties not varying or removing the essentialia of a partnership.

What right do all partners have in relation to the management of the partnership?

All partners are entitled to take part in management and cannot be excluded, unless this is agreed to by all the partners.

Why can't a partnership own property in its own right?

Since the partnership is not a separate legal entity it cannot own property in its own rights and it is jointly owned by the partners.

What is expected of partners due to the nature of the relationship between them?

Due to the nature of the relationship between the partners, they must act in good faith.
This means that each partner is in a position of trust in relation to the other partners, and is obliged by law to act in the best interests of other partners.

What does duty to account imply for a partner?

Each partner must account to the others for what he has received in pursuit of the business of the partnership. To this end, each partner must keep proper records to enable him to account for his transactions.

What does joint and several liability for debts mean in the context of a partnership?

When a partner incurs an obligation on behalf of the partnership, he acts in two capacities namely that he binds himself as a principal, and as an agent on behalf of the other partners.

What is the practical consequence of joint and several liability

A creditor of the partnership may sue each partner for his pro-rata share of any debt that is owing to that creditor OR the creditor may sue one partner for the entire debt, in which case that partner may demand a contribution from each of his co-partners, in accordance with their pro- rata share of the debt.

What is the order or recourse provided to the creditor?

However, a creditor who obtains a judgment against the partnership must first execute judgment against partnership before proceeding to individual partners.

In external relationships of a partnership, what powers does each partner have?

A partner has not only the powers of an agent, but he may also be said to be a surety for his fellow partners, for they are all liable.

What is the concept 'implied authority'?

Implied authority is created where the principal tacitly (by conduct rather than words) authorises an agent to perform an act on his behalf.

When can a partnership be dissolved?

A dissolution of a partnership may take one or more of the following ways:

• Lapse of time
• Completion of partnership business
• Agreement
• Change of membership
• Death
• Court Order

What happens if one partner dies?

Death of a partner terminates the partnership.
Remaining partners are not obliged to continue with partnership with one another unless the partners had previously agreed that if one of them died, the survivors would continue with partnership after death.

What is expected for a partnership to work and justify what action could be taken if that's not the case?

In Purdon v Muller 1960 (2) SA 785 (E) the court held that a partnership is like a marriage, there must be give and take and the partners must bear with one another. It is not a small thing that entitles one partner to bring the relationship to an end, but the breach of duty must be serious to warrant dissolution.