LAW 122 Chapter Notes - Chapter 20: Limited Liability Partnership, Limited Liability, Corporate Personhood
17 Oct 2018
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Week 5 Answers
Question 1.
Describe a set of facts (i.e. create a
fact pattern) where you believe that it
would make more sense for two
people to set up a business as a
corporation rather than a partnership.
Please explain why you believe that a
corporation makes more sense based
on such facts.
Answer 1.
This question is looking to have you (a) compare and contrast the characteristics of partnerships versus
corporations, and (b) in light of those characteristics present an argument based on the facts at hand for why you
think a partnership or a corporation would be a better fit for this business.
In terms of creating a fact pattern, while the facts you create are completely up to you, you would want to identify
issues where there are risks that are best managed through a corporation. For example, you may want to describe a
high risk business (e.g. selling dangerous chemicals) where it makes sense for those involved in the business to try
to limit their potentially broad liability that comes with such an area of business.
Hence, when discussing partnerships, you could then discuss the following:
because general partnerships result in unlimited personal liability for their partners, such a structure could be
problematic given the dangerous nature of the business.
if the two principals are insistent on using a partnership, they could consider using a limited partnership as the
limited partnerships limit their liability to the amount of their investment, but because a limited partnership requires
that at least one of the partners be a general partner who has unlimited liability, they may not be able to agree as to
which one of them would be the general and which one of them the limited partner.
a general partnership may be appealing since one can come into creation simply by 2 or more people carrying on
business together with a view to a profit, such that no formalities are otherwise required. Operationally then, it may
be simpler to start doing business as a partnership.
Similarly, for example, when discussing corporations, you could then discuss the following:
corporations are separate legal persons from their shareholders. As such, liabilities incurred by the business are
incurred by the corporation rather than the shareholders. As the two principals are entering into a high risk business,
they may very well prefer to have liabilities accrue to the corporation rather than to them personally.
As corporations can issue shares to fund their activities, that may be appealing to the two principals to start up a
company that, given the risks involved, may be costly to set up (e.g. to ensure regulatory compliance proper risk
management, etc,).
This is one of those questions for which there is no right or wrong answer; to answer a question such as this
effectively you need to demonstrate that you understand the defining characteristics of partnerships versus
corporations and how those characteristics play out in light of particular facts.
Question 2.
“Piercing the corporate veil should
occur more frequently than it does.”
Do you agree with this statement?
Please explain your answer.
Answer 2.
As corporations are separate legal persons from their shareholders, these shareholders generally are not personally
responsible for the liabilities of the corporation. This limited liability is one of the key, if not the key, reason, why
corporations are such a popular business structure.
However there are certain rare and exceptional times when the courts believe that one or more shareholders in a
corporation need to be personally liable for the liabilities. When a court does this it is called “piercing the corporate
veil”. As noted above, piercing the corporate veil only happens in exceptional circumstances, and generally require
the court to have found serious fraud, wrongdoing, or unfairness committed by the shareholders. Importantly, it is
difficult to predict when the corporate veil will be pierced.
As to whether the corporate veil should be pierced more frequently, that is a matter of opinion. Issues that could be
flagged in arguing your opinion on this matter include the following:
• more frequent piercing of the corporate veil would take away one of the defining characteristics of corporations (i.e.
limited liability for shareholders, which could discourage investment in businesses;
• it is unethical to allow for those to engage in wrongdoing to be able to hide behind the legal fiction of corporate
personhood.
Question 3.
Which of the following are TRUE:
A. Small businesses will always want
to incorporate.
B. Partnerships pay dividends.
C. The default rule is that a
partnership will continue following
the death of a partner.
D. Partners in a general partnership
and sole proprietors are similar in the
liability they are exposed to.
Answer 3.
• FALSE. While incorporating is not difficult to do, the costs involved in doing so and there are certain formalities
involved. Hence, partnerships may be popular with some small businesses. Moreover, where a small business is
being run by an individual, they may want to organise themselves as a sole proprietorship, where there is no
separation between the business and the individual. Such a structure does have risks (e.g. unlimited personal
liability for the sole proprietor) and may have require certain costs and formalities (e.g. registering for a business
license) but they are simple to set up and have certain tax advantages.
FALSE. Corporations pay dividends. They are one of the rights that must be attached to the shares of a corporation
(though that right but does not need to be attached to all classes of shares; they must be attached to at least 1 class,
however).
FALSE. Unless the partners agree otherwise in a formal partnership agreement, a partnership will dissolve (i.e. be
terminated) upon the death of a partner.
TRUE. Both sole proprietors and partners in a general partnership have unlimited personal liability.
Question 4.
Answer 4.
Document Summary
Describe a set of facts (i. e. create a fact pattern) where you believe that it would make more sense for two people to set up a business as a corporation rather than a partnership. Please explain why you believe that a corporation makes more sense based on such facts. In terms of creating a fact pattern, while the facts you create are completely up to you, you would want to identify issues where there are risks that are best managed through a corporation. Operationally then, it may be simpler to start doing business as a partnership. Similarly, for example, when discussing corporations, you could then discuss the following: corporations are separate legal persons from their shareholders. As such, liabilities incurred by the business are incurred by the corporation rather than the shareholders. As the two principals are entering into a high risk business, they may very well prefer to have liabilities accrue to the corporation rather than to them personally.
