Exam 21: Basic Forms of Business Organizations

Artemis is a university professor carrying on an Internet- based auction business which is losing money. He is concerned about liability and wants to transfer the business to a corporation he will incorporate. He will be the sole shareholder, director, and officer. He thinks that his business will continue to lose money for the next couple of years before it turns profitable. He is living on his professor's income and plans to continue to deduct the business losses against that income. Can he do this?

Incorporation is a process that only lawyers may carry out.

Eileen is considering incorporating a corporation under the Canada Business Corporations Act to carry on her toxic waste disposal business. She has heard that incorporation is a foolproof strategy to avoid personal liability for obligations of the business. Which of the following are TRUE?

Wilder and Joanne are carrying on a law firm business as a partnership under the name Wilder and Joanne Law Firm. Joanne has decided to leave. Which of the following strategies will guarantee that she does not become liable for any obligation of the firm arising after she moves on?

Directors of a corporation should issue shares as soon as possible after incorporation because

Which of the following is an important issue raised by the separation of ownership and control in a corporation?

The fiduciary duty owed by one partner to another requires which of the following of a partner?

Which of the following are TRUE?

Kalla decided to set up a limited partnership. First she incorporated KalCo. Inc, a corporation of which she was the sole shareholder, director, and officer. She intends KalCo. Inc to be the general partner. Her spouse, Roger, who will not be involved in the business in any way will be the initial limited partner. She will try to find other investors willing to become limited partners. Kalla can create a limited partnership with this proposed structure.

Craig and Judy want to open a French restaurant. Neither has any money to invest. Instead of borrowing money directly, they are planning to incorporate a corporation to own the restaurant business. The corporation will borrow the necessary money from a bank. This way, if the business fails, they will not be personally responsible for repaying the loan. Will this be a successful strategy?

The value of common shareholders' shares is based on the residual value of the corporation, which is inherently difficult to assess. Consequently, the value of common shares is always somewhat uncertain.

Yasir and Rahool are partners in an accounting firm. Each contributed $10 000 in capital and Yasir has loaned the partnership a further $15 000. The partnership also owes its bank $25 000. Yasir and Rahool want to dissolve the partnership. They plan to pay themselves back $10 000 each first, then distribute $25 000 to the bank, and finally pay back Yasir's loan if there is enough money left. This plan for distribution is consistent with partnership law.

Which of the following statements is TRUE?

Rachi is a wealthy businessperson with substantial personal assets. One of the businesses she carries on is a health club. She has carried on this business as a sole proprietorship, but she has decided to incorporate a corporation under the Canada Business Corporations Act to carry it on. She will be the sole shareholder and director. If you were a client of the health club, which of the following would be a legitimate concern based on the change in the legal status of the health club business?

Luke and Aldith are thinking about setting up a partnership to carry on a consulting business, but want to spend as little as possible. They have agreed that they will share profits and losses equally. Do they need a partnership agreement?

Sam and Jemma each owned a 50 percent interest in an office building. Which of the following is a factor which would support a conclusion that their relationship is a partnership?

Doren carried on a toy store business as a sole proprietorship. He incorporated Doren Toys Inc and transferred the business into the corporation. Later the same week, he signed a lease on behalf of Doren Toys with Patrice for a new store premises for the toy store business. The next week, he found a place he liked better and decided to try to figure out a way to get out of the lease with Patrice. He decided that he would transfer the business and all other assets out of the corporation and back to himself. Then he caused the corporation to default on the lease. This is a perfect plan because the corporation is the person who is liable to make the payments under the lease. If Patrice sues the corporation she will get nothing. There is no way that she will be able to claim against Doren directly.

The most significant limitation on use of a sole proprietorship is that

Compare the relative advantages and disadvantages of using a partnership and a corporation to carry on a business

Yasmin and Elvis were partners. Yasmin committed a tort against Patagonia Inc while acting in the course of partnership business. Patagonia suffered a loss of $500 000. It successfully sued and now intends to satisfy judgment by collecting the appropriate amount. Which of the following statements is TRUE?