Deck 21: Basic Forms of Business Organizations

Question 1

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 and has no right to 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.

Answer 1

True

Question 2

Incorporation is a process that only lawyers may carry out.

Answer 2

False

Question 3

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.

Answer 3

False

Question 4

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 must obtain a business licence.
D)the sole proprietor must register a business name.
E)the sole proprietor has unlimited personal liability for all obligations of the sole proprietorship business.

Question 5

A sole proprietorship comes into existence when a person

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

Question 6

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 7

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 million 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 8

The value of common shareholders' shares in a non-publicly traded company,is based on the residual value of the corporation,which is inherently difficult to assess.Consequently,the value of common shares is generally somewhat uncertain.

Question 9

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

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

Question 10

Aaron and Yarun are carrying on a takeout pizza business as a partnership and Yarun has 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 11

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 12

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

Question 13

Owen is a prominent 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 definitely liable as a partner to pay for the computers.

Question 14

Which of the following is FALSE?

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 is vicariously liable for torts of employees in the course of the sole proprietorship business.
D)A sole proprietor cannot be an employee of the sole proprietorship business.
E)A sole proprietorship is a cautious method of forming of business as the proprietor has no legal liability for tort of contract and the proprietorship business is a separate legal entity from the proprietor.

Question 15

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 16

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

Question 17

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 the default rules of partnership law.

Question 18

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 possible way that she will be able to claim against Doren directly.

Question 19

Shareholders,acting solely as shareholder can incur obligations on behalf of the corporation in which they hold shares.

Question 20

Sam and Jemma each owned a 50 percent interest in an office building.Which of the following is a factor that would support a conclusion that their relationship is NOT a partnership?

A)Sam and Jemma are actively involved in the management of the building.
B)Sam and Jemma are jointly responsible for all expenses associated with the building.
C)Sam and Jemma have a bank account out of which they pay expenses relating to the building and each has signing authority.
D)Sam takes responsibility for finding tenants and Jemma collects the rents.
E)Sam lent the money to Jenna for the office building and he has a 50 percent interest as security for the loan.Sam takes no active part in the business,its profits,or its loses.

Question 21

Ella is a partner in a law firm operating as a general partnership.One of the firm's clients deposited $1 million 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 million.Which of the following is TRUE?

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

Question 22

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 kilograms of haddock for the partnership.Which of the following is TRUE?

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

Question 23

Which of the following statements is TRUE?

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

Question 24

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 best ensure that she does not become liable for any obligation of the firm arising after she moves on?

A)Joanne takes out an advertisement in a local newspaper announcing her retirement.
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 enters into an agreement with Wilder under which he promises to remove her name from the firm name,as well as from all letterhead and other papers of the firm.
D)Joanne sends a letter to all of the clients she knows,advising them of her retirement.
E)There is no way for Joanne to guarantee that she will not be liable for partnership debts after she leaves.The best method is to dissolve the partnership by court application for dissolution on notice to all possible claimants against the partnership,its assets,or its income.

Question 25

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 the corporation has breached its contract with the creditor.
B)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.
C)when a business has been incorporated to do something or facilitate the doing of something that is illegal or improper,such as fraud.The business is being used as a cloak for a fraudulent or illegal purpose.
D)when a corporation does not have sufficient assets to meet its reasonably foreseeable liabilities resulting from carrying on its business.
E)When the court decides in its unfettered discretion that it would be just,fair,and equitable to all parties to do so.

Question 26

If you were considering selling $1 million 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 personal assets of the individual partners
B)whether the individual partners had agreed to indemnify each other against any partnership liabilities that they have to pay individually
C)the value of the assets of the partner's spouses
D)the value of the personal assets of the employees of the partnership business
E)the designations of heirs that the partners had made in their respective wills

Question 27

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

A)The same person may be a shareholder,as well as a director and an officer.
B)Directors and officers need to be shareholders as well.
C)Shareholders must ensure that management act in the best interests of the shareholders who own the corporation rather than management who controls the management of the corporation.
D)Can a shareholder be a senior manager in the corporation?
E)What happens when a shareholder dies?

Question 28

Which of the following statements is TRUE?

A)Partners often have a high degree of trust and confidence in each other and it is necessary for an effective partnership that they do so.
B)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.
C)An indemnification agreement between partners will always be complete protection against unauthorized liabilities.
D)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.
E)Partners have contractual risk to partnership contracts entered into by other partners in the course of the partnership business,but they do not have a similar tort risk.

Question 29

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

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

Question 30

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

A)the shares should be issued before the price goes up.
B)the directors need to be elected by the shareholders.
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)by-laws need to be approved by shareholders,and so shares must be issued so there are some shareholders.
E)the corporation needs shareholders to start carrying on business.

Question 31

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

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

Question 32

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

Question 33

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)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.
C)Simone and Claire would each contribute the same amount to the partnership initially.
D)Either sister can make management decisions for the partnership business independent of the other without the other's participation.
E)The sisters plan to buy a car,which will be used only in the partnership business.

Question 34

Rachi is a wealthy business person 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)Management personnel will change.
B)Standards for cleanliness and service quality will decline.
C)Prices for annual memberships will go up.
D)The risk that any claim you might have against the business will not be paid will likely increase.
E)It will be no use to you to complain to Rachi about any problems you have with the operation of the health club.

Question 35

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

A)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.
B)Athalone can never be personally liable for any liability of the corporation.
C)In most situations,Athalone will not be personally liable for the obligations of the corporation.
D)Athalone's personal liability for the liabilities of the corporation is limited to the total of his personal assets.
E)Athalone will never have to assume personal liability to creditors of the corporation.

Question 36

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 cannot make Mac a partner because unanimous consent is required to admit a new partner.
B)Peter can make Mac a partner by obtaining the consent of one of the other partners.
C)Peter can make Mac a partner because every partner is entitled to choose their successor.
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 37

Which of the following would you expect to find in the general by-law of a corporation?

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

Question 38

Which of the following statements is TRUE?

A)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.
B)Both limited partners and general partners have unlimited liability for the obligations of the partnership.
C)All partners in both limited partnerships and general partnerships are entitled to give advice regarding management.
D)In a limited partnership,the liability of all partners for the obligations of the partnership is limited.
E)A limited partner can control the general partner without losing their limited liability as a limited partner.

Question 39

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 is FALSE?

A)Sometimes,at the request of a creditor,courts will disregard the separate legal existence of the corporation and impose liability on a shareholder,but these circumstances generally involve egregious or fraudulent conduct using the corporation as a cloak to facilitate that conduct.
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 as the corporation.
C)Incorporation will generally shield shareholders for the claims of trade creditors and consumers.
D)Incorporation does reduce risk for shareholders by protecting them against liability for torts for which the corporation is liable.
E)A shareholder of a corporation obtains no business advantage by conducting business through a corporation as opposed to a proprietorship.

Question 40

In which of the following situations is a partnership NOT dissolved?

A)One partner writes a letter to the others stating that the partnership is terminated.
B)A partnership is set up to operate a booth selling buttons at the Olympics and the Olympics are over.
C)One of the partners dies.
D)A partnership is set up for 14 years and 14 years have passed.
E)The same partners decide to continue the partnership but in a different type of business.

Question 41

Lee starts a company that does painting and landscaping.He registers the name "Brush Ups" and hires Josh as a painter.Josh has no interest in the functioning of the business and only paints.If a customer is unhappy with Josh's work then

A)both Lee and Josh are jointly and severally liable.
B)the company's liability is limited to the assets owned by the company.
C)Josh is the only one liable because he is just an employee,not a partner.
D)Lee is vicariously liable for the actions of Josh.
E)because he is the only employee,Josh will be considered a partner.

Question 42

A limited liability partnership (LLP)is a variation on the partnership form of business.Which of the following is false?

A)An LLP has the characteristics of a general partnership,but with specific limitations on the liability of the partners.
B)The limitation on liability of an LLP varies depending on the province.
C)An LLP provides special tax treatment that is not available in a limited partnership or a general partnership.
D)An LLP is limited to certain practicing professions.
E)An LLP must include the words Limited Liability Partnership or its abbreviation,LLP.

Question 43

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

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

Question 44

Darren and Jeff enter into a partnership where Darren is the limited partner and Jeff is the general partner.Which of the following is true?

A)Limited partners can never take an active role in the management of the partnership.
B)Limited partners can take an active role in the management but they will lose their limited liability up to the amount of the general partner.
C)Limited partners cannot take an active role in the management of the partnership,but they can advise management.
D)In a limited partnership,the general partner and the limited partner have limited liability.That is why it is called a limited partnership.
E)A limited partnership exists when two or more people carry on business with the intention of making a profit,but limited partnerships must be registered in order for the limited partner to retain limited liability.

Question 45

The CBCA

A)applies to every corporation that operates in Canada.
B)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.
C)provides the model for the corporation legislation that exists in every province in Canada.
D)applies only to corporations that conduct business in areas that,according to sections 91 and 92 of the Constitution,fall within the legislative authority of the federal government.
E)governs most types of business organizations,including partnerships and sole proprietorships.

Question 46

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

A)Kerry almost certainly is an employee of 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)Kerry is legally required to register the name "K-Girl's Lawn & Yard."
E)Like every sole proprietorship,K-Girl's Lawn & Yard must obtain a business licence before its starts to conduct business.

Question 47

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)the building and the office equipment,but not the car.
C)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.
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 48

Stephen set up a film production company in partnership with Hilary.The company has never made a successful film,and,as such,their only asset is their camera,worth $20 000.Thinking that their new film will be a success,Stephen signs a contract with Brad Pitt,despite Hilary's protests,promising to pay him $1 million or 5% of the profits of the film,whichever is higher.The film is a flop and now they can't afford to pay Brad.Which of the following is true?

A)If Brad sues,they will only be liable up to the value of the company's assets.
B)If Brad sues,only Stephen will be personally liable because he set up the contract.
C)If Brad sues,Stephen and Hilary will be jointly and severally liable.
D)If Brad sues,the company will not be liable because Stephen broke his fiduciary duty.
E)If Brad sues,the company is vicariously liable if Stephen is also an employee.

Question 49

Shelly,Mackay,and Chan are setting up a partnership.They decide that Chan will make all managerial decisions,Mackay will do the bookkeeping,and Shelly will put in the necessary capital - as such,Shelly will have the greatest share of the company (51%),Chan the second greatest (30%),and Mackay the least (19%).They make no alterations to the default rules of the partnership agreement.Which of the following is most likely true?

A)If Chan and Mackay vote together on a matter,it will go through.
B)Mackay probably has greater access to the books.
C)Shelly gets the lion's share of the profits.
D)If Shelly votes against Chan and Mackay,the matter will go through.
E)Shelly is entitled to the interest on the capital she contributed.

Question 50

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 paid on an equity investment is more secure than the return on debt.
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 on equity is riskier than debt but is not fixed and may be higher.
E)It is easier to assess the price of an equity investment.

Question 51

Ten years ago,Tad and Tori created a partnership.At that time,Tad 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 percent 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 $1.2 million.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)Tori will receive an amount equal to her original contribution and repayment of her loan.
B)Tori will receive an amount that reflects the fact that she performed 60 percent of the partnership's work.
C)Tad and Tori will receive the same amount.
D)A judge will consider all of the circumstances and then exercise a discretion to determine how much each party is entitled to receive.
E)Tori will receive $800 000.

Question 52

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

Question 53

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)Provincially incorporated corporations have restrictions on the types of businesses that they can carry on.
D)The limited liability of provincially incorporated corporations is not recognized in other provinces or territories.
E)A company incorporated under the Canada Business Corporations Act has the right to carry on business across Canada but may have to comply with provincial registration requirements,provided those provincial registration requirements due not unconstitutionally interfere with that right.

Question 54

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

A)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.
B)Under a limited liability partnership,a partner may avoid liability if another partner commits a tort of negligence if certain requirements are met by the partner seeking to avoid liability.
C)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.
D)A partner cannot be held liable for torts and breaches of contract that another partner committed while acting in an unauthorized way.
E)A partner is liable for debts and liabilities of the spouses of their partners.

Question 55

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

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

Question 56

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

Question 57

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)Because she is a shareholder,Jennifer cannot also be a creditor of the company.
B)Because she is a shareholder,Jennifer cannot also be an employee of the company.
C)Jennifer is taxed for one third of any profits that the company earns.
D)If Jennifer dies,the company automatically will cease to exist unless the other shareholders purchase Jennifer's assets from her estate.
E)Jennifer may be a director of the company even though she is also a shareholder,and as a director Jennifer would owe duties to the company.

Question 58

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

A)As a matter of law,a partnership is treated as a type of "person," distinct from the individuals who act as partners.
B)As a general practice,each partner is an employee of the partnership.
C)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.
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 59

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

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

Question 60

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)A partnership may exist even if Zach and Jessica signed a document that expressly said that their relationship was not a partnership.
B)Zach will be considered a partner as long as he was paid for his services out of the business's profits.
C)A partnership cannot exist unless the business holds property apart from both Jessica and Zach.
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)Because Zach and Jessica were working together,he is liable for her tort even if they were not formally partners.

Question 61

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 62

"In small businesses with few shareholders,the corporate law rules that 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 63

"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 64

Ernesto owns three companies that all provide moving services within the city of Toronto.Ernesto is the sole shareholder in each of the companies,and each company only owns one truck worth $30 000 and no other assets.Ernesto has insurance covering up to $40 000.One of these companies has destroyed all of Meaghan's furniture during a move,valued at $80 000.If she sues,which of the following is false?

A)Meaghan can only recover damages from Ernesto's third-party insurance.
B)The court may pierce the corporate veil in order to adequately compensate Meaghan.
C)Meaghan may be able to recover $70 000 from the corporation.
D)Ernesto may have to declare bankruptcy on the corporation.
E)The driver who caused the damage may be liable for a portion of the damage.

Question 65

Annabelle operates a maid service as a sole proprietorship,but she's thinking about incorporating under the Canada Business Corporations Act.She would remain the sole shareholder.From her clients' perspective,which of the following is true?

A)They should be excited because Annabelle will be able to provide better service.
B)They should be worried that the company's name might change if it fails the name search.
C)They should be worried that they will no longer be able to talk to Annabelle personally about problems with the maid service.
D)They should be worried that if there is an issue,they may not be able to recover the entirety of the damage.
E)They should be excited because it is less likely that the service will go out of business.

Question 66

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?

Question 67

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,and 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 issued preferred shares are held by Clay's mother.Can Oneal buy control of this business by buying all of the common shares of the corporation from Clay?

Question 68

ABC Corporation is financed by both debt and equity.In its shareholder agreement,it promises to pay monthly dividends to all shareholders.Recently,it has come into some financial trouble and is having trouble making payments.Which of the following is true?

A)ABC should pay dividends or risk bankruptcy.
B)ABC should pay its creditors or risk bankruptcy.
C)ABC must pay dividends or it risks being sued for breach of contract.
D)ABC must pay both dividends and its creditors or risk bankruptcy.
E)ABC should declare bankruptcy now to avoid any obligations it currently has.

Question 69

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 70

Stan is thinking about starting a toxic waste disposal business.He plans to collect the waste from 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 71

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 72

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,and 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 73

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 2012,the business had grown and she determined that she needed experienced help to run the business.In November 2012,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 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 2013,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 74

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 12,2012.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 75

Artemis is a university professor carrying on an Internet-based auction business that 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 76

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 77

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

Question 78

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.