Bermuda Small Business Development Corporation

1. Bermuda Small Business Development Corporation Legal Matters Breakfast Seminar 22 July 2008

2. Attride-Stirling & WolonieckiThe Benefits of Incorporating a Small Business & Understanding Partnership Arrangements

3. ASW Members • Larry Mussenden - Lawyer • Natasha Scotland – Corporate lawyer • Charlene Gilbert – Corporate Administrator • Shannon Dyer - Law Student • Deshay Caines – Law Student

4. A Sole Proprietorship • Single person with a great idea • Starts a business, puts his money into business • Enters contracts, makes money • Business grows • Same bank accounts – personal/business • No financial records or some financial records • No difference between business and person

5. An Incorporated Company • Separate legal entity from person • Can sue and be sued • Shareholders & directors • Assets & Liabilities belong to the company • Bank accounts are separate from personal accounts • Financial records are separate from personal finances • Background Checks • Know Your Customers (KYC), Registrar of Companies (ROC), Bermuda Monetary Authority (BMA)

6. The Companies Act 1981 • Incorporation • Management of company • Administration of company • Local/Exempt companies • Applies to small businesses that incorporate also

7. The Companies Act 1981 (cont’d) • Incorporation fees • Annual Fees • Statutory returns • Annual General Meetings (AGMs) • Corporate services offered by law firm corporate departments • A small business doesn’t have to do these things on their own

8. Benefits of Incorporating • Limited Liability – debt attached to company • Claims limited to assets of companies • Attraction to investors • Contracts with other companies – may prefer companies • Continuity - company can continue on as business although shareholders (owners) may change

9. The Risks of Not Incorporating • Business and personal are the same • Any claims extends to everything business has and the person owns • Debts attach to personal property – a huge judgment against you can follow you around for 20 years • Growth of business – hard to attract investors to grow the business • Continuity of business – what happens to business when something happens to owners

10. Case 1 Family/Business Dispute Edmund Marshall Plaintiff Seller -V- Michael Rego Sousa Defendant Buyer • The plaintiff seller and the defendant buyer are first cousins, almost brothers. Now because of this dispute they no longer speak. • The dispute arose when the seller agreed to sell the fishing business and boat to buyer for $75,000 in 1987. As a result, the seller turned down other offers because of the verbal agreement between with his cousin. • Then the Buyer told him he wasn’t going to buy the fishing business because his newly-acquired girlfriend (now wife) did not want him to become involved in that type of business. Harsh words where spoken and the Seller consulted his lawyers. He then sold his fishing business for less money to someone else. • The Judge stated that the Buyer knew that he had agreed to purchase the business. By his failure to complete the purchase, there is a breach of contract by the Buyer. • The verbal agreement was binding in a court of law. The Buyer had to pay the Seller $10,000 – the estimated difference of the lower sale price. • The individual had to pay out of his personal finances.

11. Case 2 Personal Injury Case Hedley Louis Stephenson Appellant -V- Rennard Russell Respondent • Sole Proprietor Construction Contractor – not incorporated. • The Supreme Court found the Contractor 35% responsible for the injury caused to the employee who fell from a building when the Contractor should have provided a safe place of work. • The Employee lived adjacent to work site. Most days he would take a short cut which involved crossing over a gap of the two premises. One day as he was taking the short cut he slipped and fell some distance below knocking him unconscious. As a result he has steel rods in his back and no longer has feeling in his legs. • The Supreme Court found the Contractor liable for not having a safe place of work and he would have had to pay 35% of the damages for injuries. The Contractor was personally liable for 35% of the potentially huge costs for the medical treatment. • If incorporated only the company's assets would have been available allowing for the Appellants private assets to remain separate. No information available about insurance. • The judgment involved in this case was overturned as no one saw the Respondent fall, the construction work did not cause the incident, the walk way was a short cut created by the employee.

12. Case 3 Louis Geraldine Dowling Plaintiff Customer –v- The Market Place Limited Defendant • The Customer was in the Market Place in Somerset. Some Chocolates attracted her attention and as she turned to go to them she slipped and fell thus sustaining injuries. She alleged that the surface of the floor was slippery and dangerous which causes her to fall. According to the store manger she saw the Customer standing at cash register# 1 and she just went down on the floor. She did not see her slip before falling. Other witnesses also gave evidence of the slippery surface of the floor, and how the floor was normally slippery like it had just been waxed. • Section 4 of the Occupiers’ and Highway Authorities Liability Act 1978 reads:- “An occupier of premises owes a duty to every visitor on his premises to take such care as In all the circumstances of the case is reasonable to see that the visitor will be reasonably safe in using the premises for the purposes for which he is invited or permitted by the occupier to be there or is permitted By law to be there.” • The Judgment: “The degree of waxing or polishing of the floor in the Market Place created a dangerous condition which caused harm to the Customer. A number or persons had been known to slip on the floor and that slippery condition was a danger which the occupier could reasonably be expected to guard against. This the Marketplace had failed to do and in its default it had failed in the duty which it owed to the Customer. Moreover it had failed to exercise the degree of supervision required by law over its floor cleaner contractor and thus remained primarily liable. I enter judgment for the Customer with damages, interest and legal costs.”

13. Partnership Arrangements • What is a partnership • Section 1 of the Partnership Act 1902: “Partnership is the relation which subsists between persons carrying on a business in common with a view of profit.”

14. Other Elements of a Partnership • The power of a partner to bind the firm • Partners are bound by the acts of the firm • Every partner is liable jointly with the other partners for all debts and obligations of the firm incurred while he is a partner • Liability of the firm for the wrongful acts of a partner • No majority of the partners can expel any partner unless a power to do so is conferred by agreement

15. Limited Partnerships • Form of partnership governed by the Limited Partnership Act 1883 • A limited partnership consists of: • One or more general partners; and • Limited partners

16. Differences in a limited partnership and general partnership • The Limited Partnership Act 1883 enables a partnership to be formed which does not display three of the normal characteristics of a general partnership: • Unlimited liability rule; • Implied authority rule; and • Management of the business rule.

17. Put into practical terms • Who manages the partnership and has the authority to bind the partnership when dealing with 3rd parties e.g banks and contractors? • THE GENERAL PARTNER • What can the limited partner do? A few examples are: (i)Approve/disapprove an amendment to the partnership agreement (ii) Consult or advise the general partner in relation to the business of the LP (iii) Be a contractor, agent, or employee of the LP

18. Distinction between Companies and Partnerships • A company is an artificial person upon formation • A partnership is not an artificial person unless it elects to have legal personality pursuant to the Partnership Act 1902

19. Legal Personality for Partnerships • A partnership can elect to have legal personality by filing a declaration with the ROC • The declaration must be signed by the partnership stating that the partnership is to have legal personality

20. What does legal personality mean for a partnership • The partnership is a legal person like a company • The partnership has unlimited capacity

21. Distinction between Companies and Partnerships • A company is an artificial person – it can acquire rights and incur obligations. The rights and obligations of the owners of the company are not the same as those of the company. • The opposite applies to partnerships. The firm is not an entity distinct from the individuals composing it and the partners collectively cannot acquire rights or incur obligations. • Therefore the rights and liabilities of a partnership are the rights and liabilities of the partners and are enforceable by and against them individually.

22. Practical Aspects for a Small Business • What Partners should think about • when starting up the partnership • when partnership is running • Investments • Bank Accounts • Assets • Trucks, Tools, Materials • Financial Records • Clients

23. Termination – Companies/Partnerships • Winding Up Company • End of partnership • Liabilities • Assets • Death of Partner • Failure of the business • Settling affairs

24. Questions and Answers