Exam 21: Basic Forms of Business Organizations

Alto Finance Inc. carries on a highly profitable business as an investment dealer. Alto is considering buying an interest in a partnership that had been carrying on a diamond mining business without success. The mine is now closed and has no current operations. Alto is interested in becoming a 50 percent partner because the partnership has losses of $5 000 000 and it would like to deduct a half of those losses against its other income. Alto can deduct the losses if it acquires a 50 percent interest in the partnership.

In small businesses with few shareholders, the corporate law rules which require a corporation to have shareholders who elect directors and who, in turn, appoint officers are highly artificial and unnecessary. Do you agree or disagree with this statement? Explain why.

Arlo works for a gardening service. At the end of each month, he receives $500 plus a share of the profits. Arlo has never invested any money in the business and does not participate in managing the business or own any of the equipment used. He has never agreed to be responsible for losses. He does whatever work is asked of him. Arlo is not a partner in the gardening business.

Which of the following concepts, as discussed in Chapter 21, represents a type of partnership that is recognized in Canadian law?

Which of the following would you expect to find in the general bylaw of a corporation?

Owen is a very well known accountant in his community. He is retiring from a partnership he has been in with several other accountants. He directs the partners to get rid of all letterhead with his name on it. Inadvertently, some of the firm's old letterhead is retained. The firm uses one of these pieces of old letterhead showing Owen as a partner to order several computers from a local business that the partnership had not dealt with previously. The business decides to sell the computers to the firm on credit. Owen is liable as a partner to pay for the computers.

Aaron and Yarun were carrying on a take- out pizza business as a partnership and Yarun had bought a car with his own money for use in the partnership business. After a few months, Yarun tells Aaron that he wants to use the car at night and on the weekends, but Aaron says it must be used exclusively for the partnership business. Since the car was paid for by Yarun, he can use it however he likes.

Francesca and Michael carefully completed the articles of incorporation for a corporation they want to incorporate under the Canada Business Corporations Act. They chose a name, "FranMic Corporation" and obtained a name search report. They submitted the report along with the necessary fee and were issued a certificate of incorporation certifying that FranMic Corporation was incorporated on November 12, 2009. They are very pleased that all this paper work is finished and they can start business. Is there anything else they should do or issues they should address as a matter of corporate law?

Where shareholders are not the same people as the directors and the officers, one of the ways that shareholders ensure that directors and officers manage the corporation in a manner which most effectively promotes shareholder interests is through their power to elect the directors.

Limited liability means that a shareholder can never be held liable for the obligations of the corporation.

K- Girl's Lawn & Yard is operated as a sole proprietorship by Kerry. Which of the following statements is TRUE?

Which statement best describes the circumstances in which a court will disregard the separate existence of a corporation and impose liability on a shareholder for obligations owed by the corporation to a creditor? A court will impose liability on a shareholder

In 2006, Sally opened a restaurant called "Traders' Place" in rented premises in Ottawa's booming financial district. She operated the restaurant as a sole proprietorship. By 2008, the business had grown and she determined that she needed experienced help to run the business. In November 2008, Sally approached Marty to see if he would become the manager of the Traders' Place business. He agreed and the following were the terms of his agreement with Sally. Each month, Marty was paid $1000 plus one percent (1 percent) of the total restaurant revenues for that month. Total monthly revenues, on average, were about $100 000. At the end of each complete calendar year that Marty worked, if the restaurant had made a profit for the year equal to or exceeding $200 000, Marty was entitled to receive 10 percent of the profits. Marty was responsible for managing the restaurant, including -opening and closing the restaurant, -hiring, firing and scheduling staff, and -ordering food and paying suppliers. Sally was responsible for the financial side of the business, including budgeting, accounting and payroll, as well as marketing. In 2009, Traders' Place profits exceeded $200 000 and Marty was paid 10 percent of the profits in accordance with the agreement. Are Marty and Sally carrying on business as a partnership.

Which of the following statements are TRUE?

Which of the following would be a good reason to choose to make an equity investment in a corporation rather than lending money to a corporation?

Shareholders, acting in that capacity can incur obligations on behalf of the corporation in which they hold shares.

Terrence has invested $10 000 to become a limited partner in Bede Limited Partnership. Bede Management Co is the general partner in Bede Limited Partnership. Ogruk is the sole shareholder of Bede Management. Which of the following is TRUE?

Alice is the sole shareholder of AliCo Inc, a corporation incorporated under the Canada Business Corporations Act. She has elected Samra as the director and Samra has appointed Ezra to be the President of the corporation responsible for its day- to- day business. Which of the following actions by Alice would be inconsistent with the separate legal existence of the corporation?

The CBCA

Jessica had operated a business for several years. Because the number of customers increased significantly, she persuaded Zach to work together with her. Two years after Zach came aboard, Jessica committed a tort, while acting in the course of the business and caused a customer to suffer a substantial loss. A question has arisen as to whether Zach and Jessica were partners. Which of the following statements is TRUE?