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McInnes/Kerr/VanDuzer: Managing the Law: The Legal Aspects of Doing Business, Fourth Edition
Chapter 21: Basic Forms of Business Organizations
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
31) 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
32) 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.
McInnes/Kerr/VanDuzer: Managing the Law: The Legal Aspects of Doing Business, Fourth Edition
Chapter 21: Basic Forms of Business Organizations
33) 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.
34) 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.
35) 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.
36) 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.
37) 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.
38) 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.
McInnes/Kerr/VanDuzer: Managing the Law: The Legal Aspects of Doing Business, Fourth Edition
Chapter 21: Basic Forms of Business Organizations
39) 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.
40) 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.
McInnes/Kerr/VanDuzer: Managing the Law: The Legal Aspects of Doing Business, Fourth Edition
Chapter 21: Basic Forms of Business Organizations
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.
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.
42) 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.
43) 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.
44) 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.
45) 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.
McInnes/Kerr/VanDuzer: Managing the Law: The Legal Aspects of Doing Business, Fourth Edition
Chapter 21: Basic Forms of Business Organizations
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.
46) 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.
47) 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.
McInnes/Kerr/VanDuzer: Managing the Law: The Legal Aspects of Doing Business, Fourth Edition
Chapter 21: Basic Forms of Business Organizations
48) 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.
Essay Questions
1) 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?
McInnes/Kerr/VanDuzer: Managing the Law: The Legal Aspects of Doing Business, Fourth Edition
Chapter 21: Basic Forms of Business Organizations
2) 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?
McInnes/Kerr/VanDuzer: Managing the Law: The Legal Aspects of Doing Business, Fourth Edition
Chapter 21: Basic Forms of Business Organizations
3) 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.”
4) 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?
McInnes/Kerr/VanDuzer: Managing the Law: The Legal Aspects of Doing Business, Fourth Edition
Chapter 21: Basic Forms of Business Organizations
5) 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?
6) Compare the relative advantages and disadvantages of using a partnership and a
corporation to carry on a business.
McInnes/Kerr/VanDuzer: Managing the Law: The Legal Aspects of Doing Business, Fourth Edition
Chapter 21: Basic Forms of Business Organizations
7) 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.
McInnes/Kerr/VanDuzer: Managing the Law: The Legal Aspects of Doing Business, Fourth Edition
Chapter 21: Basic Forms of Business Organizations
8) “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.
9) 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.
10) Francesca and Michael carefully completed the articles of incorporation for a
corporation they want to incorporate under the Canada Business Corporations Act. They
McInnes/Kerr/VanDuzer: Managing the Law: The Legal Aspects of Doing Business, Fourth Edition
Chapter 21: Basic Forms of Business Organizations
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?
11) 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?
McInnes/Kerr/VanDuzer: Managing the Law: The Legal Aspects of Doing Business, Fourth Edition
Chapter 21: Basic Forms of Business Organizations
12) 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?
13) 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?
McInnes/Kerr/VanDuzer: Managing the Law: The Legal Aspects of Doing Business, Fourth Edition
Chapter 21: Basic Forms of Business Organizations
14) 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?
15) “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.
McInnes/Kerr/VanDuzer: Managing the Law: The Legal Aspects of Doing Business, Fourth Edition
Chapter 21: Basic Forms of Business Organizations
