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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
True/False Questions
1) 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.
a. True
b. False
2) If two people share profits from a business, they are necessarily in a partnership.
a. True
b. False
3) 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.
a. True
b. False
4) 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.
McInnes/Kerr/VanDuzer: Managing the Law: The Legal Aspects of Doing Business, Fourth Edition
Chapter 21: Basic Forms of Business Organizations
a. True
b. False
5) 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.
a. True
b. False
6) 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.
a. True
b. False
7) 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
McInnes/Kerr/VanDuzer: Managing the Law: The Legal Aspects of Doing Business, Fourth Edition
Chapter 21: Basic Forms of Business Organizations
loan if there is enough money left. This plan for distribution is consistent with the default
rules of partnership law.
a. True
b. False
8) 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.
a. True
b. False
9) Incorporation is a process that only lawyers may carry out.
a. True
b. False
10) Limited liability means that a shareholder can never be held liable for the obligations of
the corporation.
a. True
b. False
McInnes/Kerr/VanDuzer: Managing the Law: The Legal Aspects of Doing Business, Fourth Edition
Chapter 21: Basic Forms of Business Organizations
11) Shareholders, acting solely as shareholder can incur obligations on behalf of the
corporation in which they hold shares.
a. True
b. False
12) 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.
a. True
b. False
13) 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.
a. True
b. False
McInnes/Kerr/VanDuzer: Managing the Law: The Legal Aspects of Doing Business, Fourth Edition
Chapter 21: Basic Forms of Business Organizations
14) 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.
a. True
b. False
15) 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.
a. True
b. False
Multiple Choice Questions
1) 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.
2) 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.
3) 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.
4) 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.
McInnes/Kerr/VanDuzer: Managing the Law: The Legal Aspects of Doing Business, Fourth Edition
Chapter 21: Basic Forms of Business Organizations
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.
5) 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.
6) 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.
McInnes/Kerr/VanDuzer: Managing the Law: The Legal Aspects of Doing Business, Fourth Edition
Chapter 21: Basic Forms of Business Organizations
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.
7) 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.
8) 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.
McInnes/Kerr/VanDuzer: Managing the Law: The Legal Aspects of Doing Business, Fourth Edition
Chapter 21: Basic Forms of Business Organizations
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.
9) 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.
10) 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
McInnes/Kerr/VanDuzer: Managing the Law: The Legal Aspects of Doing Business, Fourth Edition
Chapter 21: Basic Forms of Business Organizations
e. providing information to the partnership about business opportunities not related to the
partnership business
11) 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.
12) 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.
McInnes/Kerr/VanDuzer: Managing the Law: The Legal Aspects of Doing Business, Fourth Edition
Chapter 21: Basic Forms of Business Organizations
13) 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.
14) 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.
15) Which of the following statements is TRUE?
McInnes/Kerr/VanDuzer: Managing the Law: The Legal Aspects of Doing Business, Fourth Edition
Chapter 21: Basic Forms of Business Organizations
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.
16) 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
17) 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.
McInnes/Kerr/VanDuzer: Managing the Law: The Legal Aspects of Doing Business, Fourth Edition
Chapter 21: Basic Forms of Business Organizations
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.
18) 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.
19) 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.
McInnes/Kerr/VanDuzer: Managing the Law: The Legal Aspects of Doing Business, Fourth Edition
Chapter 21: Basic Forms of Business Organizations
20) 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.
21) 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
McInnes/Kerr/VanDuzer: Managing the Law: The Legal Aspects of Doing Business, Fourth Edition
Chapter 21: Basic Forms of Business Organizations
22) 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.
23) 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.
McInnes/Kerr/VanDuzer: Managing the Law: The Legal Aspects of Doing Business, Fourth Edition
Chapter 21: Basic Forms of Business Organizations
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.
24) 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
25) 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?
McInnes/Kerr/VanDuzer: Managing the Law: The Legal Aspects of Doing Business, Fourth Edition
Chapter 21: Basic Forms of Business Organizations
26) 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
27) 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.
McInnes/Kerr/VanDuzer: Managing the Law: The Legal Aspects of Doing Business, Fourth Edition
Chapter 21: Basic Forms of Business Organizations
28) 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.
29) 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
30) 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
