Deck 21: Basic Forms of Business Organizations

Question 1

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?

A) because Zach and Jessica were working together, he is liable for her tort even if they were not formally partners
B) a partnership cannot exist unless the business holds property apart from both Jessica and Zach
C) Zach will be considered a partner as long as he was paid for his services out of the business's profits
D) the parties' business organization cannot be a partnership if the business was losing money with the result that there were no profits to share
E) a partnership may exist even if Zach and Jessica signed a document that expressly said that their relationship was not a partnership

Answer 1

E

Question 2

Which of the following statements is TRUE with respect to the risk of liability under a partnership?

A) Because of their special position within partnerships, managing partners cannot be held liable for torts and breaches of contract that are committed by other partners.
B) A partner cannot be held liable for torts and breaches of contract that another partner committed while acting in an unauthorized way.
C) A person may be held liable as a partner, as long as the reasonable person would believe that that person was a partner in the partnership.
D) Under a limited liability partnership, a partner may avoid liability if another partner commits a tort of negligence.
E) None of the above.

Answer 2

D

Question 3

Which of the following statements is TRUE?

A) Corporations have the same legal characteristics as sole proprietorships and corporations.
B) The taxation of corporations and partnerships is the same.
C) Just like partners and sole proprietors, shareholders are entitled to participate in management of the business.
D) The process for bringing a corporation into existence in Canada is essentially the same as for bringing a sole proprietorship or partnership into existence.
E) Corporations may be subject to the same licencing requirements as sole proprietorships and partnerships.

Answer 3

E

Question 4

Ella is a partner in a law firm operating as a general partnership. One of the firm's clients deposited $1 000 000 in the firm account to be used by Ella to complete a real estate purchase. Ella negligently bungled the transaction with the result that the client lost the $1 000 000. Which of the following is TRUE?

A) The partnership is not liable for Ella's negligence because Ella breached her fiduciary duty to act in the best interests of the partnership.
B) The partnership is not liable for Ella's negligence because negligence may be a criminal act as well as a tort.
C) The partnership is not liable for Ella's negligence because they did not authorize Ella to commit negligence.
D) The partnership would not be liable for Ella's negligence if it was a limited partnership.
E) The partnership is liable for Ella's negligence.

Question 5

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

A) the sole proprietor alone must do all the work in the sole proprietorship business.
B) it is simple to terminate.
C) the sole proprietor has unlimited personal liability for all obligations of the sole proprietorship business.
D) the sole proprietor must obtain a business licence.
E) the sole proprietor must register a business name.

Question 6

Which of the following statements are TRUE?

A) A prohibition in a partnership agreement on partners incurring a specific obligation will prevent partnership liability arising if one of the partners tries to commit the partnership to such an obligation.
B) An indemnification agreement between partners will always be complete protection against unauthorized liabilities.
C) Partners do not have to worry about individual partners incurring unauthorized liabilities because each partner has a fiduciary duty to act in the best interests of the partnership.
D) Partners often have a high degree of trust and confidence in each other.
E) none of the above

Question 7

Norman and Velma are partners carrying on a trucking business. They share a single truck. Which of the following is TRUE?

A) Norman will only be liable for Velma's negligence in driving the truck if it is committed in the course of her employment.
B) Norman will never be liable for any negligence by Velma in driving the truck.
C) Norman will always be liable for Velma's negligence in driving the truck.
D) Norman will be liable for Velma's negligence in driving the truck if the negligence is in the course of the partnership business.
E) Norman will only be liable for Velma's negligence in driving the truck if he was aware that she was using it.

Question 8

If you were considering selling $1 000 000 worth of computer equipment to a partnership on credit, which of the following factors would influence your assessment of the ability of the partnership to pay you back?

A) the value of the assets of the partner's spouses
B) the value of the personal assets of the employees of the partnership business
C) whether the individual partners had agreed to indemnify each other against any partnership liabilities that they have to pay individually
D) the value of the personal assets of the individual partners
E) all of the above

Question 9

A sole proprietorship comes into existence when a person

A) obtains a licence for a business.
B) begins to carry on a business.
C) registers a business name.
D) files articles of incorporation.
E) pays the fee for registering a business name.

Question 10

Cassandra is the sole shareholder of a corporation incorporated under the Canada Business Corporations Act which carries on a grocery store business. Which of the following statements is TRUE?

A) Cassandra will pay no tax no matter what the corporation's profits are until some amount is paid to her personally.
B) Cassandra could work as a cashier employed by the corporation.
C) Cassandra does not own any of the assets of the corporation.
D) If Cassandra was killed in an automobile accident, the corporation would continue to exist.
E) all of the above.

Question 11

Ten years ago, Tad and Tori created a partnership. At that time, he contributed $400 000 in property and Tori contributed $600 000 in cash. as capital for the partnership. Two years later, Tori provided $300 000 to the partnership as an interest- free loan. That loan has not yet been repaid. During the entire life of the partnership, Tori performed approximately 60 per cent of the partnership's work, while Tad tended to devote much of his time to various charitable causes that were unrelated to the partnership. The partnership has now been dissolved. Sale of the partnership assets produced a fund of $1 200 000. It is necessary to spend $200 000 on debts that the partnership still owes to various creditors. Assuming that the parties have not replaced or modified the default rules applicable to their partnership

A) Tad and Tori will receive the same amount.
B) Tori will receive an amount that reflects the fact that she performed 60 per cent of the partnership's work.
C) a judge will consider all of the circumstances and then exercise a discretion to determine how much each party is entitled to receive.
D) Tori will receive an amount equal to her original contribution and repayment of her loan.
E) Tori will receive $750 000.

Question 12

Which of the following are TRUE?

A) A sole proprietor is exclusively responsible for performing all contracts entered into in connection with the business.
B) Sole proprietors must include any income or loss from the sole proprietorship business in their income for income tax purposes.
C) A sole proprietor cannot be an employee of the sole proprietorship business.
D) A sole proprietor is vicariously liable for torts of employees in the course of the sole proprietorship business.
E) all of the above.

Question 13

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

A) bylaws need to be approved by shareholders and so shares must be issued so there are some shareholders.
B) the corporation needs shareholders to start carrying on business.
C) until the shares are issued, the only people who can act for the corporation are the directors. If anything happened to them the corporation would be unable to act.
D) the directors need to be elected by the shareholders.
E) the shares should be issued before the price goes up.

Question 14

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

A) providing information to the partnership about business opportunities not related to the partnership business
B) paying over to the partnership any amounts earned from activities unrelated to the partnership
C) giving up any business interests outside the partnership
D) looking after the personal health and welfare of the other partners
E) passing up opportunities to compete with the partnership

Question 15

In which of the following situations is a partnership dissolved?

A) A partnership is set up to operate a booth selling buttons at the Olympics and the Olympics are over.
B) One partner writes a letter to the others stating that the partnership is terminated.
C) A partnership is set up for 14 years and 14 years have passed.
D) One of the partners dies.
E) all of the above

Question 16

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?

A) The return on equity is riskier than debt but is not fixed and may be higher.
B) The holder of an equity investment always receives a higher return than a debt holder.
C) The holder of equity has the same legal entitlement to receive dividends as a debt holder has to receive interest.
D) The return paid on an equity investment is more secure than the return on debt.
E) It is easier to assess the price of an equity investment.

Question 17

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?

A) Sam and Jemma are jointly responsible for all expenses associated with the building.
B) Sam takes responsibility for finding tenants and Jemma collects the rents.
C) Sam and Jemma are actively involved in the management of the building.
D) Sam and Jemma have a bank account out of which they pay expenses relating to the building and each has signing authority.
E) all of the above

Question 18

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?

A) Alice lending money to the corporation
B) Alice selling her shares in the corporation to Samra
C) Alice selling some real estate belonging to the corporation and keeping the money
D) Alice providing consulting services to the corporation and keeping the profits
E) Alice selling some real estate to the corporation and keeping the profits

Question 19

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?

A) The risk that any claim you might have against the business will not be paid will increase.
B) Standards for cleanliness and service quality will decline.
C) Management personnel will change.
D) Prices for annual memberships will go up.
E) You will not be able to complain to Rachi about any problems you have with the operation of the health club.

Question 20

Which of the following statements is TRUE with respect to partnerships?

A) As a matter of risk management, a general partnership carrying on any type of business should be organized so that each partner is a limited liability partner.
B) As a matter of law, a partnership is treated as a type of "person," distinct from the individuals who act as partners.
C) As a general practice, each partner is an employee of the partnership.
D) Partnership property includes every piece of property that is held by any of the partners.
E) In a general partnership, each partner has unlimited personal liability for the obligations of the partnership.

Question 21

The CBCA

A) provides the model for the corporation legislation that exists in every province in Canada.
B) governs most types of business organizations, including partnerships and sole proprietorships.
C) applies only to corporations that conduct business in areas which, according to sections 91 and 92 of the Constitution, fall within the legislative authority of the federal government.
D) applies to every corporation that operates in Canada.
E) requires that people who want to incorporate a corporation file a report that demonstrates that no other corporation already has the name that the corporation will use after it is incorporated.

Question 22

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

A) when a business has been incorporated to do something or facilitate the doing of something which is illegal or improper, like fraud.
B) when a corporation does not have sufficient assets to meet its reasonably foreseeable liabilities resulting from carrying on its business.
C) when the creditor is an individual who really needs the money and imposing liability on the shareholder is the only way to ensure that the individual obtains relief.
D) when the corporation has breached its contract with the creditor.
E) in no circumstances.

Question 23

Common shares are entitled to the "residual value" of the corporation. Which of the following statements best describes residual value?

A) the value of the corporation remaining after all the creditors have been paid
B) the value of the tangible and intangible assets of the corporation if they were sold today
C) the value of the corporation remaining after the business has been sold
D) the value of the business based on expectations of its future growth
E) the going concern value of the corporation

Question 24

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?

A) Patagonia is entitled to collect from Elvis, but only to the amount that represents the value of the assets and services that Elvis has contributed to the partnership
B) Patagonia can only take assets that qualify as partnership property
C) Patagonia is entitled to satisfy its judgment against assets personally held by Yasmin, but not against assets personally held by Elvis
D) If Patagonia collects $500 000 from Yasmin personally, she is entitled to collect that half that amount from Elvis in the absence of an agreement between them that allocates their responsibility differently.
E) If Patagonia collects $500 000 from Yasmin personally, she is entitled to collect that amount from Elvis.

Question 25

If two sisters, Simone and Claire, were setting up a partnership to provide French lessons, which of the following arrangements would require a change to the default rules under partnership law?

A) Simone and Claire each want to receive 50 percent of the profits from the business.
B) Simone and Claire would each contribute the same amount to the partnership initially.
C) Either sister can make management decisions for the partnership business independent of the other.
D) If one of the sisters had to pay out 100 percent of a business obligation, the other would reimburse her for 50 percent of the cost.
E) The sisters plan to buy a car which will be used only in the partnership business.

Question 26

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

A) Can a shareholder be a senior manager in the corporation?
B) The same person may be a shareholder, as well as a director and an officer.
C) How can shareholders ensure that management acts in the interests of shareholders?
D) Directors and officers need to be shareholders as well.
E) What happens when a shareholder dies?

Question 27

Peter, Kathy, and Soren are partners in a hardware store business. Peter wants to retire and have his son, Mac, assume his place in the partnership. Which of the following is TRUE?

A) Peter can make Mac a partner because every partner is entitled to choose his or her successor.
B) Peter cannot make Mac a partner because unanimous consent is required to admit a new partner.
C) Peter can make Mac a partner by obtaining the consent of one of the other partners.
D) Peter cannot make Mac a partner unless he has first worked in the partnership business.
E) Peter can make Mac a partner because partnership interests can be assigned.

Question 28

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?

A) Terrence is prohibited from providing management advice to Bede Limited Partnership.
B) Terrence can never be liable for more than the $10 000 he has invested.
C) Terrence is prohibited from taking control of Bede Limited Partnership.
D) Terrence could work for Bede Limited Partnership as the office manager of Bede Management Co and not lose his limited liability.
E) Bede Limited Partnership can never be liable for more than the total amount invested by all limited partners.

Question 29

Which of the following statements are TRUE?

A) All partners in both limited partnerships and general partnerships are entitled to advise regarding management.
B) In a limited partnership, the liability of all partners for the obligations of the partnership is limited.
C) Both limited partnerships and general partnerships come into existence as soon as two or more people start carrying on business with a view to a profit.
D) Both limited partners and general partners have unlimited liability for the obligations of the partnership.
E) none of the above

Question 30

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

A) partnership in transitu
B) chartered partnership
C) dividend partnership
D) partnership in pais
E) limited liability partnerships

Question 31

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?

A) Joanne enters into an agreement with Wilder under which he promises to remove her name from the firm name, as well as all letterhead and other papers of the firm.
B) Joanne agrees to allow her name to be used in the firm name but obtains an indemnity from Wilder against any liabilities which arise as a result.
C) Joanne takes out an advertisement in a local newspaper announcing her retirement.
D) Joanne sends a letter to all of the clients she knows advising them of her retirement.
E) none of the above.

Question 32

Familias Inc is a small corporation. Jennifer is one of only three shareholders. Questions recently have arisen regarding Jennifer's relationship to the company. Which of the following statements is TRUE?

A) if Jennifer dies, the company automatically will cease to exist unless the other shareholders purchase Jennifer's assets from her estate
B) because she is a shareholder, Jennifer cannot also be a creditor of the company
C) because she is a shareholder, Jennifer cannot also be an employee of the company
D) Jennifer is taxed for one third of any profits that the company earns
E) none of the above

Question 33

Stella is planning to build a national chain of restaurants. She should choose to incorporate under the Canada Business Corporations Act for which of the following reasons?

A) Provincially incorporated corporations are prohibited from carrying on business in another province or territory.
B) Provincially incorporated corporations need permission from each province and territory in which they want to carry on business.
C) The limited liability of provincially incorporated corporations is not recognized in other provinces or territories.
D) Provincially incorporated corporations have restrictions on the types of businesses that they can carry on.
E) Provincially incorporated corporations need a licence to carry on some kinds of businesses.

Question 34

Babak and Cal are partners in a restaurant business. Their partnership agreement says that Babak does not have authority to sign contracts for supplies for the partnership business. Babak contracted with Doris for the supply of 10 kilos of haddock for the partnership. Which of the following is TRUE?

A) The contract is binding on the partnership if Doris thought that Cal was a partner.
B) The contract is binding on the partnership, but Cal is not personally responsible for the contract.
C) The contract is not binding on the partnership.
D) The contract is not binding on the partnership unless Doris asked Babak if he had authority to contract on behalf of the partnership.
E) The contract is binding on the partnership unless Doris knew that Babak did not have authority to contract.

Question 35

Sam and Sarah have created a partnership for the purposes of giving financial advice. The partnership required certain property in order to operate in an effective and profitable way. First, a building was purchased with money earned by the partnership. Second, Sam donated a car, which he had purchased before entering into the partnership, to the partnership. And third, Sarah purchased office equipment with money that she had before she entered into the partnership. Two years after the partnership had started operations, it was successfully sued by a disgruntled customer. The assets that are available to satisfy that judgment include

A) the building, but not the car or the office equipment.
B) assets personally belonging to Sarah, but not assets personally belonging to Sam, if the actions that led to the judgment were committed by Sarah in the course of the partnership business.
C) the building and the office equipment, but not the car.
D) partnership assets as well as personal assets that belong to either Sam or Sarah.
E) partnership assets but not personal assets that belong to either Sam or Sarah.

Question 36

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?

A) Incorporation does reduce risk for shareholders by protecting them against liability for torts for which the corporation is liable.
B) Sophisticated creditors may demand that a shareholder guarantee a debt of the corporation with the result that the shareholder becomes liable for the debt as well.
C) Sometimes, at the request of a creditor, courts will disregard the separate legal existence of the corporation and impose liability on a shareholder.
D) Incorporation will generally shield shareholders for the claims of trade creditors and consumers.
E) all of the above

Question 37

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

A) Kerry is legally required to register the name "K- Girl's Lawn & Yard".
B) Kerry can reduce the risks created by K- Girl's Lawn & Yard by hiring employees to cut grass on behalf of the sole proprietorship.
C) Kerry can eliminate business liabilities of the sole proprietorship after they have arisen simply by dissolving K- Girl's Lawn & Yard.
D) Like every sole proprietorship, K- Girl's Lawn & Yard must obtain a business licence before its starts to conduct business.
E) Kerry almost certainly is an employee of K- Girl's Lawn & Yard.

Question 38

Athalone incorporated a corporation under the Canada Business Corporations Act. As the sole shareholder he has limited liability. Which of the following statements are TRUE?

A) Athalone's personal liability for the liabilities of the corporation is limited to the total of his personal assets.
B) Athalone is personally responsible for liabilities arising out of the business the corporation carries on but only up to the amount he has invested in return for his shares.
C) Athalone can never be personally liable for any liability of the corporation.
D) Athalone will never have to assume personal liability to creditors of the corporation.
E) In most situations, Athalone will not be personally liable for the obligations of the corporation.

Question 39

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

A) an employment contract
B) the memorandum of association
C) a resolution issuing shares of the corporation
D) the rules for calling shareholder meetings
E) the characteristics of the shares of the corporation

Question 40

Preferred shares would be of interest to an investor having which of the following characteristics?

A) an investor who wants to be sure to get his money back
B) an investor who wants a voice in the affairs of the corporation through the voting rights attached to the shares
C) an investor looking for an investment where the return is guaranteed
D) an investor looking for the highest return and prepared to take the greatest risk
E) an investor who is looking for a return that is fixed but not guaranteed

Question 41

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.

Question 42

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

Question 43

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.

Question 44

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.

Question 45

Incorporation is a process that only lawyers may carry out.

Question 46

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

Question 47

Stan is thinking about starting a toxic waste disposal business. He plans to collect the waste of businesses that produce it and then dispose of it in a sanitary landfill. In order to start this business, Stan will need a substantial amount of money to buy and develop the landfill site and purchase five trucks capable of transporting toxic waste. What concerns would you have about operating this business as a sole proprietorship if you were Stan? What alternative form of business organization would you recommend and why?

Question 48

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.

Question 49

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?

Question 50

Only a few corporations have shares that, on the dissolution of the corporation, are entitled to receive the property of the corporation remaining after all the creditors and prior claim holders have been paid.

Question 51

No one should invest in a limited partnership unless they are prepared to stay out of management. Do you agree or disagree with this statement? Explain why.

Question 52

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.

Question 53

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.

Question 54

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.

Question 55

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

Question 56

If two people share profits from a business they are necessarily in a partnership.

Question 57

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.

Question 58

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.

Question 59

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.

Question 60

If Ted and Mary were entering into a business relationship and did not want to be found to be partners, it would be sufficient to include a clause in their agreement to that effect.

Question 61

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.

Question 62

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?

Question 63

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?

Question 64

Rupert is starting up a new high tech business and needs to be able to attract some of the best computer programmers available. He has set up a corporation to carry on the business. It has two classes of shares, common shares which vote, are entitled to receive dividends and the remaining property of the corporation on dissolution, and Class A preferred shares which do not vote but are entitled to an annual dividend of 10 percent of the issue price and, on dissolution, to receive the amount invested in return for the preferred shares. Dividends on the Class A preferred shares must be paid before any dividends are paid on the common shares. Also, no payment on dissolution can be made to the holders of the common shares until payment is made to the holders of Class A preferred shares. Rupert holds all of the 100 common shares the corporation has issued. He expects that the common shares of the business will be sold in a couple of years for an enormous profit because the business will grow very fast. No Class A preferred shares have been issued. In order to attract programmers, Rupert wants to be able to offer them shares in his corporation in addition to paying them a good salary. What kind of shares should these be? Are there any concerns Rupert should have regarding his strategy?

Question 65

One of the purposes of the law of partnerships is to protect the reasonable expectations of people who are dealing with the partnership. Explain how the law achieves this objective with reference to two examples of legal rules relating to partnership.

Question 66

Explain the meaning of the requirement for the existence of a partnership that the people carrying on the business have a "view to a profit."

Question 67

Kim is the sole shareholder, director, and officer of Kim Consulting Inc. She is concerned that, because she is really the only person involved in the corporation, any creditor who wants to will be able to get a court to order that she be personally liable for the obligations of the corporation's business. Is Kim's concern a reasonable one? Explain why or why not.

Question 68

Oneal wants to buy a computer software sales business being carried on by Softstuff Inc. The corporation has two classes of shares, common shares which vote, are entitled to receive dividends and the remaining property of the corporation on dissolution, and Preferred Shares which do not vote but are entitled to an annual dividend of 10 percent of the issue price and to receive the amount invested in return for the Preferred Shares. Dividends on the Preferred Shares must be paid before any dividends are paid on the common shares. Also, no payment on dissolution can be made to the holders of the common shares until full payment is made to the holders of Preferred Shares. Clay holds all of the 10 000 issued common shares. All of the 500 hundred issued Preferred Shares are held by Clay's mother. Can Oneal buy this business by buying all of the common shares of the corporation from Clay?

Question 69

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?

Question 70

Adam is lending $50 000 to a partnership being carried on by Selma and Jennifer. The arrangement he has with them is that they will pay him back out of their annual profits. Selma and Jennifer will decide how much to pay back out of profits in each year. Interest of 10 percent per year will have to be paid on whatever amount is outstanding after the payment of the profit share in each year. He is content with this rather uncertain arrangement because he does not need the money currently and the 10 percent return is a good rate. In order to protect his investment, he wants Selma and Jennifer to enter into a contract that requires them to continue carrying on the partnership business and to make monthly reports to him. Adam is concerned that he may be considered a partner in the business. Is he? Is there anything he can do to reduce the risk of being found a partner?