Legal Fundamentals For Canadian Business Canadian 4th Edition Yates Test Bank

Legal Fundamentals for Canadian
Business Canadian 4th Edition Yates

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Legal Fundamentals for Canadian Business, 4e (Yates)
Chapter 7 Methods of Carrying on Business
1) Which of the following is correct with respect to sole proprietorships?

A) The sole proprietorship is a separate legal entity.
B) A sole proprietorship exists where two or more people carry on business together with a view
toward profits.
C) The sole proprietor has limited liability.
D) The sole proprietor has unlimited liability.
E) A sole proprietorship must be incorporated.
Answer: D
Diff: 1 Type: MC Page Ref: 204
Skill: Recall
2) Which one of the following statements is correct with respect to sole proprietorships?
A) The sole proprietor is restricted to service-type businesses.
B) A sole proprietorship involves limited liability.
C) The sole proprietor is a society under the Societies Act.
D) A sole proprietorship involves unlimited liability for the proprietor.
E) A sole proprietorship is a separate legal entity with one shareholder.
Answer: D
Skill: Recall
3) Which one of the following statements is correct with respect to sole proprietorships?
A) The sole proprietor has the same extent of liability as a shareholder.
B) The sole proprietor must consult with the other owners before making any major decisions
regarding the business.
C) The sole proprietor is responsible for the torts committed by an employee that take place
within the scope of employment.
D) The sole proprietor need not adhere to any licensing and government regulations.
E) The sole proprietor has limited liability.
Answer: C
Skill: Recall
4) Which one of the following situations will result in a partnership existing? Assume that no
corporation has been created.
A) Joe and Mary own a house together and share the income from it.
B) A lawyer and a real estate agent split a commission.
C) Employees are given bonuses because of increased profits.
D) Joe pays back a debt to Harry by giving Harry a percentage of the profits from his business.
E) Joe and Mary own a shoe store together and share the profits.
Answer: E
Skill: Applied
1
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5) Which of the following is the proper definition of a partnership as set out in the Partnership
Act?
A) Partnership exists where two or more persons carry on business in common with a view to
profit.
B) A partnership exists only where two or more people enter into a written agreement to be
partners.
C) A partnership is created where a corporation with shareholders is registered with the federal
government.
D) A partnership is only created where the partners actually share the profits from a business.
E) A partnership exists where any business is carried on with a view toward profits.
Answer: A
Skill: Recall
6) Which of the following statements best describes a partnership?

A) Partnership involves two or more persons carrying on business with a view toward profits.
B) Partnerships are created when two or more persons specifically agree to be in partnership.
C) Partnerships are like any other form of contract; they can only be created when there is
consensus between the parties in the form of offer and acceptance to that effect.
D) Partnerships involve limited liability.
E) Partnerships are only created when they have been properly registered with the government.
Answer: A
Skill: Recall
7) Adams was approached by a Mr. McCarthy of XYZ Co., who requested that Adams pay
$10 000 to extinguish a debt owed by the partnership of Adams and Jefferson. Adams denied the
partnership and the liability. In asserting his claim, McCarthy cited the following facts, all of
which he could prove. Which of these facts is the strongest evidence of the existence of a
partnership?
A) Adams and Jefferson co-owned property.
B) Adams and Jefferson shared gross returns from a business.
C) Adams and Jefferson worked together for a non-profit charity.
D) Adams received a commission from Jefferson based on the sale price of the goods sold by
Adams for Jefferson.
E) Adams and Jefferson shared the profits from a business.
Answer: E
Skill: Applied
2
8) In which of the following is there not a fiduciary duty owed?
A) officer of a company to the company
B) partners to each other
C) manager to employer
D) agent to her principal
E) director to shareholders
Answer: E
Skill: Recall
9) Which one of the following is correct with respect to the rights of partners unless they have
agreed otherwise?
A) No major decision can be taken without a majority vote agreement of all partners.
B) Only the partners that have contributed the largest capital amount have the right to share in
management.
C) All profits are shared equally among the partners.
D) A partner can sell her share of the partnership to another person without the agreement of the
other partners.
E) Personal expenses incurred by the partners in the course of business are reimbursed.
Answer: C
Skill: Recall
10) Which of the following statements is correct with respect to the Partnership Act?
A) When in conflict, the terms of the federal Partnership Act override the provincial partnership
acts.
B) The Partnership Act is enacted by the federal government and creates a uniform and cohesive
system of partnership law for all of Canada.
C) The Partnership Act states clearly that a partnership is only created by specific agreement
between the partners to that effect.
D) The Partnership Act sets out provisions that will govern the relations between the partners
unless those partners have agreed otherwise.
E) The Partnership Act always overrides any provisions contrary to it set out by the partners in
the partnership agreement.
Answer: D
Skill: Recall
3
11) Chuck, Howard, and Ben decide to start a business venture, developing and distributing
educational software. For tax reasons, they do not incorporate. Each contributes $10 000, and
Howard also contributes a truck and his programming expertise. They agree that all three will be
actively involved in the day-to-day management of the business. To determine their rights and
obligations, they enter into a one-page agreement that provides only that each of Chuck, Howard,
and Ben will receive 33.3% of the profits but also states specifically they are not to be viewed as
partners. Based on these facts, which of the following statements is true?
A) Chuck, Howard, and Ben will not be considered partners because of their express intention in
their agreement.
B) Chuck, Howard, and Ben will be considered partners in the eyes of the law, because they
share profits and are involved in the management of the business.
C) Chuck, Howard, and Ben will be considered partners, but someone claiming against the
partnership will only be able to collect 33.3% from any one partner because of the agreement.
D) Chuck, Howard, and Ben are not partners because they do not share profits in proportion to
their capital contributions.
E) Chuck, Howard, and Ben are not partners because to be partners they must be professionals,
such as dentists, lawyers, or doctors.
Answer: B
Skill: Applied
12) Which of the following is incorrect with respect to the creation of a partnership?
A) A partnership can only be created with the consent of the parties.
B) The duties and obligations of partners to each other can be modified by agreement.
C) The business activity must be continuing in order for it to indicate the existence of a
partnership.
D) The common method of creating a partnership is by agreement.
E) An important indication as to whether a partnership exists is the sharing of the profits of the
business activity.
Answer: A
Skill: Recall
13) Which one of the following statements is correct with respect to the creation of a partnership
agreement?
A) A partnership can be created by an intention to share the revenues between the partners.
B) For a partnership to exist, the relationship giving rise to it must be of an ongoing business
nature, not a one-time promotion.
C) For a person to be a limited partner, there must be at least two general partners.
D) A partnership can be created only by contract.
E) Where two people agree to enter into a partnership, there is no partnership created unless all
elements of a contract are present.
Answer: B
Skill: Recall
4
14) In which one of the following situations will a court find that a partnership exists?
A) Joe sells his business to Harry for $10 000 for the assets and a further $20 000 for goodwill,
the goodwill portion to be paid at a rate of 20% of the profits from the business until paid.
B) Joe is a partner in a shoe store and sells his share of the business to Harry without the consent
of his partner.
C) Joe and Mary promote several dances at school and split the profits.
D) Joe, a partner in a law firm, dies and Joe's widow takes over Joe's share of the profits.
E) Joe and Mary, while attending university, purchase a house and share the profits from the rent
after deducting expenses.
Answer: C
Skill: Applied
15) Which of the following will establish the existence of a partnership?

A) The goodwill portion of the sale of a business is repaid by a share of the profits.
B) An employee receives a profit-sharing bonus.
C) The beneficiary of a deceased partner takes that partner's share of the income from the
partnership.
D) The parties intend to share the expenses of the business.
E) A debt is repaid by the creditor taking a share of the profits.
Answer: D
Diff: 2 Type: MC Page Ref: 207, 208
Skill: Applied
16) Which of the following statements is correct with respect to unlimited liability?
A) Only the partner's share of the partnership assets can be used to satisfy the debt incurred by
another partner.
B) Each partner can be held responsible for the debts of the partnership no matter how great they
are.
C) Unlimited liability means the partner can lose what he has invested but no more.
D) The partner cannot only lose what she has invested but can also be required to pay an
additional amount equal to what she has invested.
E) If there are two partners, each partner can be held responsible for an amount equal to but no
more than one half of the debts of the partnership.
Answer: B
Skill: Recall
5
17) With regard to the liability of partners, which of the following is false?
A) A general partner has unlimited liability for any loss suffered because of the negligent act
(e.g., omission) of one of his partners if there are insufficient funds in the partnership to pay the
person who suffered the loss.
B) The partnership, and thus the partners, is liable for any loss suffered because of a tort
committed by its employee in the course of employment.
C) A general partner who retires from the partnership by giving notice of his leaving to the other
partners could still be found liable for debt pursuant to a contract made when he was a partner.
D) A general partner could not be liable for losses suffered by a client because of misapplication
of funds unless he knew about or took part in the misapplication.
E) A limited partner is liable only for the amount of his initial investment if he follows the
directions set out in the Partnership Act (e.g., not taking part in management).
Answer: D
Skill: Recall
18) Which of the following is correct with respect to the law of partnership?
A) A partnership cannot be created inadvertently.
B) Each partner is vicariously liable for the wrongful acts of their partners committed in the
course of the partnership business.
C) Partners are only liable for the torts of their partners if they in fact knew that the wrongful
conduct was taking place.
D) Joint and several liability means that each partner can be sued several times.
E) Partners have unlimited liability, meaning that they can lose up to the amount they have
invested in the business.
Answer: B
Skill: Recall
19) Partners are responsible for the debts and obligations of the partnership. With respect to
contracts, each partner is considered to be:
A) the primarily liable party if the partner takes on the role of agent.
B) a principal of any contract entered into by an employee of the partnership.
C) an agent of the other partners so that any contract entered into by one partner with respect to
the partnership business is binding on them all.
D) an agent of the partnership only so that any contract entered into by one partner only binds the
partnership entity itself and not the other partners.
E) liable only for his or her capital investment should a breach of contract occur.
Answer: C
Skill: Recall
6
20) Fred and Carole were trying to create a list of the pros and cons of sole proprietorship,
partnership, and corporation to determine the best structure for carrying on business. Which of
the following is true with regard to being a general partner?
A) Each partner is an agent for every other partner and for the firm itself, so a partner may be
liable for the contracts made by an incompetent partner.
B) Every general partner faces limited liability for the debts of the partnership.
C) A partner is liable for only the amount that he or she invested in the partnership firm.
D) Retiring from a partnership by giving notice to the partners frees a partner from the liabilities
he or she faced while being a partner of the firm.
E) A partner is liable to pay from his or her personal assets only when the partner has committed
a criminal act.
Answer: A
Skill: Applied
21) Which one of the following statements is correct with respect to the law of partnership?
A) Partners are responsible for any contracts entered into by the partners related to the
partnership business.
B) Partners are only responsible for contracts entered into by the partnership if the third party
knew that the person it was dealing with was a partner in the partnership.
C) A partner is responsible for contracts with third parties entered into by the partners only
where it has been clearly stated by the partner to the third parties that he is entering the contract
on behalf of the partnership.
D) Partners cannot bind their partners in contract without specific written authority.
E) Every partner is responsible for every contract entered into by the partnership.
Answer: A
Skill: Recall
22) Which of the following is correct with respect to partnership?

A) A partnership can be made up of only limited partners.
B) Partnership is a separate legal entity.
C) Partners are not agents for each other.
D) General partners have unlimited liability.
E) General partners have limited liability.
Answer: D
Skill: Recall
7
23) Which one of the following statements is correct with respect to the liability of partners?
A) A general partner is responsible, independent of what she has invested, for any losses caused
to outsiders through the partnership business if the assets of the partnership are not enough to
cover the claim.
B) If a third party is injured because of an activity carried on by the partnership, that third party
can only go after the personal assets of a partner if the assets of the partnership are not enough to
provide compensation and the damage was actually caused by the conduct of that partner.
C) When a partner enters into a partnership arrangement, she can only lose what she has invested
in that partnership.
D) If there are three equal partners in a partnership, an injured third party can only collect one-
third of the claim from any one partner.
E) A partner can protect herself from any liability beyond her investment if one of the other
partners specifically agrees in the partnership agreement to be responsible for all such liability.
Answer: A
Skill: Recall
24) Joe Smith owns a bookstore as a sole proprietor. He is also a partner in a hotel, which
borrowed $100 000 from the bank. Which of the following statements is true?
A) The bank can look to the assets of the bookstore to pay off the debt.
B) Although the bank can go after Smith's personal assets, it cannot go after the assets of the
bookstore because the bookstore is a separate legal entity from Smith.
C) The bank can only go after the assets of the bookstore if Smith is the actual person who
negotiated the loan with the bank.
D) The bookstore's assets will only be available to the bank if the bookstore is operated by Smith
in conjunction with the hotel.
E) Because of the concept of limited liability, Smith can lose only what he has invested in the
hotel.
Answer: A
Skill: Applied
8
25) Dave and his sister Chris make unusual kites. They both create the designs and Dave makes
the patterns. Friends have always wanted to buy their kites. After Chris completes a post-
secondary marketing program, she begins to talk to Dave about going into business selling kites.
Ed, a friend of Chris, wants to be involved. He says he could buy the supplies and do other odd
chores. They decide to try to make a go of it and to share the profits as follows: Dave, 35%;
Chris, 35%; and Ed, 30%. Things go well for seven months. They even hire George to deliver
kites to the increased number of stores buying them. Unfortunately for the business, Chris and
Ed become romantically involved. This is followed by a heated dispute. Ed disappears with
$1300 collected from customers and $600 worth of supplies, which he had bought on behalf of
the business from its regular supplier. At about the same time, George negligently breaks a
customer's $200 lamp while delivering a kite. On these facts, which of the following is true?
A) If the partnership funds are not sufficient to pay the partnership debts, the creditors can look
to the individual partners for payment.
B) Although George broke the lamp while delivering a kite, the partners are not liable because it
was George's own fault.
C) When Ed buys supplies for the business on credit, he is acting as an agent for the business and
he alone is liable for those debts.
D) Only Chris would be responsible for Ed's misapplication of the customers' money.
E) Since Dave, Chris, and Ed did not sign a partnership agreement, they are not considered a
general partnership.
Answer: A
Skill: Applied
26) Which one of the following statements about general partnerships is false?
A) A general partner can limit his liability for the firm's obligations by using the term "limited"
after his name on stationery.
B) Each partner has unlimited personal liability for the debts of the partnership.
C) The Partnership Act can imply contractual terms into a partnership where the partners did not
expressly agree on some detail of the relationship.
D) Partnership is the relationship that exists between persons carrying on business together with
a view to making a profit.
E) A partnership can exist even without a written partnership agreement.
Answer: A
Skill: Recall
9
27) Recent changes in partnership law allow partnerships to be registered as a "limited liability
partnership" or LLP. When carrying on business as a limited liability partnership, non-negligent
partners stand to lose:
A) their investment in the firm.
B) all of their personal assets if a successful claim is brought against the partnership on the basis
of another partner's mistake.
C) absolutely nothing.
D) all of their personal assets except those protected from seizure under bankruptcy legislation.
E) assets jointly held with a spouse.
Answer: A
Skill: Recall
28) Alison told her partners in writing that she would be leaving the law partnership at the
current partnership year-end, January 31, 2014. At year-end, Alison's partners bought her
partnership interest and agreed that she would no longer be liable for any of the prior or
subsequent partnership obligations. In February 2014, one of the remaining partners absconded
with $2 million held for Mr. Smith, a long-time client, taken in trust in September 2013. Mr.
Smith sued the partnership, the partners, and Alison. Based on the facts described, which of the
following statements is true?
A) Alison has no right to recover any funds she has to pay from her former partners.
B) Mr. Smith can recover on his judgment out of the partnership assets.
C) Even if Alison gave Mr. Smith actual notice of her leaving the partnership, and he agreed that
she would no longer be obligated for the partnership, she can be held liable to Mr. Smith.
D) After the partnership assets are exhausted, Mr. Smith can recover on his judgment from any
one of the remaining partners but not from Alison.
E) Only the remaining partners, not Alison, have the right to recover anything they have to pay
from the absconding partner.
Answer: B
Skill: Applied
29) With regard to the liability of partners, which of the following is true?
A) A general partner who retires from the partnership by giving notice of his leaving to the other
partners could still be found liable for debt pursuant to a contract made when he was a partner.
B) A limited partner has unlimited liability beyond the amount of his initial investment.
C) A general partner has limited liability for any loss suffered because of the negligent act (e.g.,
omission) of one of his partners.
D) A general partner could not be liable for losses suffered by a client because of misapplication
of funds unless he knew about or took part in the misapplication.
E) The partnership, and thus the partners, are liable for any loss suffered because of a tort
committed by its employee outside the course of his employment.
Answer: A
Skill: Recall
10
30) Joe R. notified his partners in writing that he would be retiring from the business partnership
at the end of 2013. It was acknowledged and agreed upon and, at year-end, the remaining
partners paid him for his interest in the partnership. In February 2014, one of the remaining
partners misapplied some trust funds that a long-time client had placed in the care of the
partnership for the purchase of a hotel. The partnership was sued, but the assets of the
partnership were not sufficient to satisfy the judgment. The successful plaintiff went against the
personal assets of the partners, including those of Joe R. What is the likely outcome?
A) Joe R. is not liable because he had retired from the partnership at year-end and had properly
notified his partners.
B) Joe R. is not liable because he had nothing whatsoever to do with the misapplication of the
trust money.
C) Joe R. is not liable since he was not a partner when the misapplication happened.
D) Joe R. is only liable for his share of the losses even if the other partners don't have the assets
to pay.
E) Joe R. is liable if he failed to give proper notice to outsiders, namely, the long-time client
whose funds were misapplied.
Answer: E
Skill: Applied
31) Which of the following is an example of a breach of a fiduciary duty?

A) A partner in a firm learned of a business forced to sell some heavy equipment. Although the
partnership could have used the equipment, he bought and sold it at a substantial profit before the
partnership was given a chance to buy it.
B) A shareholder of ABC Ltd., a trucking corporation whose shares are listed on the Vancouver
Stock Exchange, is working as an employee for ABC Ltd.'s competitor, Jonstone Trucking.
C) A shareholder of a corporation voted in favour of an acquisition by the corporation at the
annual general meeting because he secretly had an interest in the corporation being purchased.
D) The directors of the corporation, contrary to a request made by the shareholders, refused to
declare dividends.
E) A promoter of a corporation sold property to the corporation for four times what he had paid
for it after he made full disclosure of his interest to an independent board of directors, which
voted for the purchase.
Answer: A
Skill: Applied
11
32) Joe and Sam were in business school together, and after they graduated they decided to open
an ice-cream store in a mall. They had skipped the classes in which they were taught about
different methods and forms of carrying on business and so gave no thought to how they would
structure their relationship. Which of the following is true with respect to the legal positions of
Joe and Sam?
A) If a customer were injured because of poorly kept food and Sam did not have the assets to pay
his half, Joe would only have to pay his half of the damages suffered.
B) If Sam were to find a great deal on anchovy ice cream and purchase 2000 litres of it, only
Sam would be liable for the debt incurred as a result of the purchase.
C) If Sam opens another ice cream store in another mall in a nearby city without telling Joe, he
must share any profits he makes with Joe.
D) Sam and Joe are not in a partnership since they have not specifically agreed to be.
E) If Sam opens another ice cream store in another mall in a nearby city without telling Joe, Joe
would be liable for any losses Sam suffered (along with Sam).
Answer: C
Skill: Applied
33) Which of the following is a violation of the fiduciary duty of a partner?

A) A violation occurs where one partner carries on a business unrelated to the partnership with
the permission of the partners.
B) A violation occurs where a partner uses the partnership property for partnership business.
C) A violation occurs where one partner learns of an investment opportunity in the field of the
partnership and tells the partners. The partners decline on the opportunity, so he takes advantage
of it himself.
D) A violation occurs where one partner uses information that he has gained from the partnership
for the advantage of the partnership.
E) A violation occurs where one partner starts another business, without the consent of the other
partners, that is the same as or in competition with the partnership business.
Answer: E
Skill: Recall
34) In which one of the following situations has the duty between partners not been breached?
A) X, Y, and Z have a partnership in a restaurant business in Winnipeg. Unknown to his
partners, Z is the major shareholder in a corporation that opens a restaurant in the same city.
B) X, Y, and Z have a partnership in a restaurant business in Winnipeg. Unknown to his partners,
Z owns 50% of the shares in the company that supplies the restaurant with its food supplies.
C) X, Y, and Z have a partnership in a restaurant business in Winnipeg. Unknown to his partners,
Z runs a catering business in the evenings using the restaurant's facilities.
D) X, Y, and Z have a partnership in a restaurant business in Winnipeg. Unknown to his
partners, Z opens a shoe store in Regina as well.
E) X, Y, and Z have a partnership in a restaurant business in Winnipeg. Unknown to his partners,
Z opens up a restaurant in the same city as a sole proprietorship.
Answer: D
Skill: Applied
12
35) Jones is a partner in a law firm in a small town, and he is also doing legal work out of his
home in the evenings for himself. Which of the following statements is correct with respect to
his responsibility for the money he earns?
A) Jones has a duty to tell the other partners, but the money is his and he can continue the extra
work regardless of the other partners' consent.
B) Jones has no responsibility; the money he makes through this extra work is his.
C) Such conduct will automatically dissolve the partnership, but Jones can keep what he has
made.
D) If Jones did not have the consent of his partners, he must pay over all money he makes
through his business at home to the partnership.
E) If Jones is a one-third partner in the law firm, he need only pay over a third of what he makes
on the side.
Answer: D
Skill: Applied
36) Three men decided to form a partnership to look for buried treasure. Luke and Mark had
expensive equipment, experience, and expertise. The third partner, Cyrus, had an old treasure
map. The three men agreed to meet on Monday on an island in the Caribbean. Cyrus had his
holiday start a few days earlier so he went ahead "to set up camp." Before the others arrived
Cyrus found the treasure. When they stepped off the plane, Cyrus handed them a dissolution of
partnership notice and claimed the entire treasure for himself. Do Luke and Mark have any legal
claim to the treasure?
A) Yes, they have an equitable claim for specific performance to the treasure.
B) No, Luke and Mark's assets and experience were not used to find the treasure.
C) Yes, the treasure was found before the partnership was dissolved; therefore, Cyrus must
account for the profit he made.
D) No, the partnership was dissolved before the full value of the treasure was determined.
E) No, but they can claim all of the out-of-pocket expenses associated with the aborted trip to the
Caribbean.
Answer: C
Skill: Applied
37) When a partnership dissolves, which of the following is not one of the causes?
A) The partnership is dissolved when one of the partners dies.
B) The partnership is dissolved when one of the partners starts a business in competition with the
partnership business.
C) The partnership is dissolved when one of the partners goes bankrupt.
D) The partnership is dissolved when one of the partners serves notice on the other partners to
that effect.
E) A partnership can be dissolved by order of the court.
Answer: B
Skill: Recall
13
38) Which of the following statements is true with respect to the obligations in a partnership
relationship?
A) In the absence of agreement to the contrary, the partnership is dissolved when one of the
partners serves the others with notice to the effect that he wishes to continue.
B) When a partnership is dissolved, its resources must be used to pay its debts and liabilities; if
its assets are insufficient to do this, the partners must use personal resources to meet those
obligations.
C) When a partnership is dissolved, each partner can only be forced by a creditor to pay a portion
of the debt equal to his share of the capital contributed.
D) A partnership can be dissolved only by court order.
E) In the absence of agreement to the contrary, when one of the partners is injured, the
partnership is dissolved.
Answer: B
Skill: Recall
39) Which of the following is true with regard to the characteristics of corporations?
A) The shareholders would be vicariously liable for any damage caused by a employee of the
corporation carrying out his or her duties.
B) The corporation is a separate legal person, but neither can sue nor be sued.
C) Directors are responsible for the shareholders of the corporation.
D) Shareholders are liable for the debts and other obligations of the corporation.
E) A shareholder's liability is limited to the amount he or she paid for the shares.
Answer: E
Skill: Recall
40) Which of the following is correct with respect to limited partnerships?

A) Limited partnership refers to the fact that no more than five people are allowed to be partners
in such partnerships.
B) Limited partnership refers to the fact that the partnership can only issue common shares.
C) Limited partnership refers to the fact that some partnerships are only created for a limited
period of time.
D) Limited partnership refers to the fact that limited partnerships can only carry on certain kinds
of businesses.
E) Limited partnership refers to the fact that some partners have limited liability.
Answer: E
Skill: Recall
14
41) Which of the following is true with regard to partnership?
A) The terms of the Partnership Act will be implied in a partnership agreement that includes
provisions on the same point.
B) Sharing gross receipts is sufficient evidence of the existence of a partnership.
C) A general partner is not an agent of the firm and the other partners.
D) No partnership can be formed unless the parties intended to create a partnership.
E) A limited partnership is an arrangement in which a partner may limit liability to his capital
contribution.
Answer: E
Skill: Recall
42) Which of the following statements is correct with respect to limited partnerships?
A) There can be no limited partnerships in Canada. If limited liability is desired, a corporation
must be created.
B) A limited partner can lose his status as a limited partner if he participates in the management
of the business.
C) There can only be one limited partner in any partnership, no matter how many partners are
involved.
D) A limited partner is totally protected and can lose no money.
E) A limited partnership is created where all partners state in the partnership agreement that they
will not be responsible for debts arising out of the partnership business and register as such with
the government.
Answer: B
Skill: Recall
43) Norma and Janet decide to form a partnership to sell gourmet picnic baskets. To raise
sufficient capital, they convince their mothers to invest $5000 each as limited partners. Norma's
mother is an experienced restaurateur and watches the new business with great interest. On
several occasions, she advises Norma and Janet on the business and contacts former business
associates to buy surplus stock. She even fills in by taking orders in the office when needed. A
customer who was made ill by eating contaminated food from a tin can supplied in one picnic
basket sues. What would be the liability, if any, of the mothers?
A) Janet's mother would be liable for $10 000, twice the amount invested, because she failed to
take part in the management of the business.
B) A limited partner has her liability limited to the amount of her initial investment; therefore,
neither mother has any further liability.
C) Because one mother lost her limited liability status, they both do.
D) Norma's mother would have unlimited liability because she took part in the management of
the business and thus becomes a general partner.
E) Both mothers would have unlimited liability because they contributed money but not services
as required.
Answer: D
Skill: Applied
15
44) Which of the following is correct with respect to limited partnerships?
A) Limited partnership refers to the fact that some partnerships are only created for a limited
period of time.
B) Limited partnership refers to the fact that some partners have limited liability.
C) Limited partnership refers to the fact that no more than five people are allowed to be partners
in such partnerships.
D) Limited partnership refers to the fact that limited partnerships can only carry on in certain
kinds of businesses.
E) Limited partnership refers to the fact that the partnership can only issue common shares.
Answer: B
Skill: Applied
45) Which of the following is considered to be a separate legal person in law?

A) a corporation
B) a sole proprietorship
C) an agency
D) a partnership
E) a professional practice
Answer: A
Skill: Recall
46) Jack Kihn incorporated and put $20 000 into the corporation by way of a shareholder's loan
and took back a chattel mortgage on the corporation's equipment. The corporation created
decorative boxes. An employee of the company delivered some boxes to a customer, who
complained about the colour used. The employee became so angry that he shoved the customer,
who fell into a glass display case, causing $30 000 damage to the customer and the case. On
these facts, which of the following is false?
A) The employee is liable for his tort and his employer is also liable.
B) Although Kihn is the sole shareholder of the corporation, he is not responsible for company
debts.
C) Kihn himself is vicariously liable for the damage caused by the employee.
D) The employee is liable for the tort of battery.
E) If the corporation went bankrupt, Kihn himself would be a secured creditor.
Answer: C
Skill: Applied
16
47) In 2011, Rambolin incorporated Rambolin Industries Ltd. and became its sole shareholder.
He loaned the corporation $10 000 and took a chattel mortgage from the corporation as security
for repayment of the loan. He became director, president, and secretary of the corporation. The
corporation prospered. Last year, you began supplying the corporation with office supplies. You
were paid at the end of each month for supplies delivered during that month. For the last six
months, however, you have not been paid. You learn that other suppliers also have not been paid
because sales have dropped drastically, apparently due to Rambolin's nasty temper caused by ill
health. Which of the following is true?
A) If this corporation were placed into bankruptcy, Rambolin would be in a better position than
you for receiving proceeds realized from the sale of the assets of the corporation.
B) Shareholders have a statutory obligation to manage the corporation, so Rambolin, as
shareholder, must exercise care in that task.
C) You could take an action under the pre-emptive right provisions under the relevant
legislation.
D) If you decided to sue for the debt, you could sue Rambolin because he is the sole shareholder
and his nasty temper caused all of the trouble.
E) If Rambolin dies, his corporation would automatically die too, and there wouldn't be any
person to sue.
Answer: A
Skill: Applied
48) A real estate agent, by virtue of his fiduciary duty to his principal, is not allowed to buy the
property being sold by his principal without full disclosure to and consent from his principal. The
real estate agent does not want to disclose that he is the buyer of the property, so he forms a
corporation and takes an offer to his principal from the corporation. Based on these facts, which
of the following is true if the principal finds out that the corporation/buyer is owned by the real
estate agent and objects to the contract?
A) The court would enforce the contract because the corporation is a separate legal entity in the
eyes of the law.
B) The court would not enforce the contract and would "lift the corporate veil."
C) The court would enforce the contract because this is not a direct breach of the agent's
fiduciary duty.
D) The court would dissolve the corporation.
E) The court would enforce the contract, but the principal would be able to claim any profits
from the agent when he took them out of the corporation.
Answer: B
Skill: Applied
17
49) Kent incorporated Dynamite Data Ltd., which worked with small businesses in developing
graphs and charts from their data for presentations to bankers, shareholders, etc. Kent loaned the
company $25 000 by way of a shareholder's loan and took as security computers, plotters, and
printers under a chattel mortgage document. An employee of the corporation, Jack, while
delivering some graphs to a customer, Roth, got into an argument with Roth, who complained
that the graph was in red and not in pink as requested. It ended with Jack punching Roth, who
fell onto a microscopic camera. The damage to Roth's nose and the camera totalled $35 000.
Which of the following is true?
A) The corporation is not liable for the damage caused by the action of its employee, Jack.
B) If the corporation went bankrupt but owed creditors (other than Roth), Kent would be in a
worse position than unsecured creditors to collect proceeds realized from the sale of the
corporation's assets.
C) Kent is liable for the damage to Roth and the camera if neither Jack nor the
employer/corporation has sufficient funds.
D) Roth's action against Jack is for the tort of assault.
E) Even if Kent, the only shareholder, died, the corporation would not die and would still owe its
outstanding debts.
Answer: E
Skill: Applied
50) Which of the following is an advantage of incorporation?

A) Shareholders owe a duty to the corporation.
B) Shareholders are liable for debts of the corporation.
C) Shares are easily transferred.
D) Shareholders can veto the decisions of directors.
E) There are no tax advantages as compared to a sole proprietorship.
Answer: C
Skill: Recall
51) John and two friends incorporated a closely held corporation. Each bought an equal number
of common shares in the corporation. Each became a director, an officer, and an authorized agent
of the corporation. Which of the following is true?
A) Each of them, as a director, owes a fiduciary duty to the others, as shareholders.
B) As director, each owes a fiduciary duty to the creditors of the corporation.
C) The corporation is more highly regulated and less free of government regulations and control
than a broadly held corporation would be.
D) If the affairs of the corporation are being conducted in a manner that is unfairly prejudicial to
any one shareholder, that shareholder could seek relief from such oppression from the court.
E) Since the corporation is a legal fiction, all of its activities must be carried out through
principals.
Answer: D
Skill: Applied
18
52) ABC Ltd. is a closely held corporation. Two of the shareholders serve as directors. As
directors, they voted to issue themselves more shares to increase their voting control of the
corporation. Which of the following provisions would aid the other shareholders?
A) indoor-management rule
B) pre-emptive right provisions
C) derivative-action provisions
D) relief-from-oppression provisions
E) dissent procedure
Answer: B
Skill: Applied
53) Three classmates incorporated about a week after graduation. The authorized capital was
500 000 common no-par-value shares. Each classmate took one share, and each was a director. If
the directors decide to issue more shares from the treasury to raise more capital, which of the
following provisions ensures that they keep their proportionate holdings?
A) relief-from-oppression provision
B) dissent procedure
C) pre-emptive right provision
D) indoor-management rule
E) derivative-action provision
Answer: C
Skill: Applied
54) You have been asked by two fellow graduates to join them in incorporating a closely held
corporation that would commence a consulting business. One was in your class, so you know
him quite well, but the other is graduating from a different school. You have been discussing the
law to review the protection it gives you. Read each of the following statements separately and
indicate which is true.
A) If you have pre-emptive rights and the directors decide to issue a new allotment of shares, the
corporation must offer you a portion of the new issue to allow you to keep your proportional
share of the corporation.
B) A shareholder's agreement allows shareholders and not officers to manage the corporation.
C) As a shareholder, you will have the right to vote for the officers of the corporation.
D) If you were voted out as a director by the others, who could show that it was in the best
interest of the corporation, you could sell your shares to any interested buyer without
interference from the other directors.
E) If you each take one-third of the first allotment of the shares, you will necessarily be a
minority shareholder, and have no voting rights in electing the directors of the corporation.
Answer: A
Skill: Applied
19
55) Smith, director of ABC Ltd., intercepted a corporate opportunity for his own benefit and
thereby caused the corporation to miss a $45 000 profit. A shareholder urged the board of
directors to take action against him. The other directors, all close friends of Smith from school
days, did not take any action against him, although they did voice their dissatisfaction with his
move. Which of the following provisions would aid the shareholder?
A) dissent procedure
B) representative action (derivative-action) provision
C) indoor-management rule
D) pre-emptive right provision
E) relief-from-oppression provision
Answer: B
Skill: Applied
56) If a corporation were wronged by negligent and fraudulent acts committed by one of its
directors and consequently suffered a $45 000 loss, and if the board of directors will not take any
action on behalf of the corporation against the wrongdoer, which of the following would be true?
A) A representative (derivative) action allows a shareholder to commence an action on behalf of
the corporation.
B) If the company failed to commence an action through its authorized agents (e.g., its directors),
no action could be taken, because a corporation is merely a legal concept and must act through
its authorized agents.
C) The shareholders could proceed under the "dissent" procedure and force the corporation to
pay them a fair market value for their shares.
D) The shareholders could sue the corporation for oppression.
E) The shareholders could force the directors to start the action on the basis of their "pre-emptive
right."
Answer: A
Skill: Applied
20
57) Andrea agreed to form a corporation with two friends, but lay awake last night rethinking her
decision. They agreed that they all wanted to be directors and officers and that they all would
have signing authority with the bank from whom the corporation is borrowing the money.
Nevertheless, Andrea began to review her assumptions. Which of the following is true?
A) When Andrea signs the promissory note at the bank on behalf of the corporation, she can just
sign her own name; she will not be personally liable as long as she intended to sign on behalf of
the corporation.
B) Andrea would be able to ask the court for "relief from oppression" if she disliked a decision
passed by the majority of the directors.
C) Andrea would be able to bring an action on behalf of the company if one of the directors
breached his or her fiduciary duty to the corporation and the other directors refused to do
anything about it.
D) As a major shareholder, Andrea would be elected as a director every year even without such a
provision in the shareholders' agreement.
E) As a shareholder, Andrea is free to compete with the company even if she is a director as
well.
Answer: C
Skill: Applied
58) Which of the following is a fiduciary relationship?

A) directors of the corporation and the corporation
B) officer of the corporation and the shareholders
C) agent and the third party
D) shareholders and the corporation
E) director of the corporation and the shareholders of the corporation
Answer: A
Skill: Recall
59) In which of the following relationships is a fiduciary duty owed?

A) the officers of a corporation to the shareholders
B) the director of a corporation to the corporation
C) the director of a corporation to the shareholders
D) a principal to his agent
E) an employer to his or her employees
Answer: B
Skill: Recall
21
60) Mrs. Marine was a director of a major investment corporation. In the course of her normal
work, she identified a land development investment opportunity that she felt would be good for
the company and passed along the information to the board of directors. The board rejected the
opportunity and told Mrs. Marine she could pursue it on her own. Mrs. Marine is trying to decide
if she should take advantage of the investment opportunity. What advice would you offer to her?
A) Mrs. Marine should consider the opportunity and ensure that no harm could come to the
corporation if she participates in the deal, as a shareholder may be able to bring an oppression
action against her in such a situation.
B) Mrs. Marine should enter into the investment opportunity with confidence, as she fulfilled her
fiduciary duty and has permission from the board of directors.
C) Mrs. Marine should consider the opportunity and ensure that no harm could come to the
corporation if she participates in the deal, as a shareholder may be able to bring a representative
action against her in such a situation.
D) Mrs. Marine should only enter into the investment opportunity after she has the permission
from the board of directors in writing.
E) Mrs. Marine should not proceed with the opportunity, as she should realize that the board of
directors could change its decision.
Answer: C
Skill: Applied
61) Art Raskle was an officer, director, and employee of a broadly held corporation. At a
directors meeting, he was surprised but pleased to learn that the corporation was discussing a
resolution to contract with the firm of Fielding's Office Supply for $200 worth of office
equipment. Raskle and a businesswoman had recently bought that business; Raskle has a 45%
interest in it. Raskle voted for the contract and the resolution passed without discussion by a vote
of 6-0. Several months after completion of the purchase, the other directors learned of Raskle's
interest in Fielding's Office Supply and called on him to account to the corporation for any profit
made. Which of the following is true?
A) Raskle must account for any profit made because he failed to disclose his interest and voted
on the question.
B) Raskle is not in breach of any fiduciary duty because the dollar value of the contract falls
below the minimum statutory threshold.
C) Raskle has not breached his fiduciary duty because his vote did not determine the matter. Had
he not voted, the result would have been the same.
D) Raskle has breached his fiduciary duty but if the sale was "fair" and if the shareholders
approve the sale by a special resolution after full disclosure, he need not account to the
corporation for any profit made.
E) Raskle is not in breach of his fiduciary duty because directors of corporations vote on
contracts in which they have an interest all the time.
Answer: A
Skill: Applied
22
62) John Hollin was an officer, director, and employee of a large broadly held corporation. At a
directors meeting, he learned that the corporation was voting on a resolution to buy a piece of
property from Sam Keanu for $100 000. It so happens that Hollin is one of three co-owners of
that property. Hollin voted for the purchase and the resolution passed without discussion by a
vote of 5-0. Several months after completion of the purchase, the other directors learned of
Hollin's ownership and called on him to account to the corporation for any profit made. Which of
the following is false?
A) Hollin should have disclosed his interest and refrained from voting or otherwise influencing
the decision.
B) Hollin owed a fiduciary duty to the corporation and breached that duty by his actions.
C) Hollin must account for any profit made because he failed to disclose his interest and voted
on the question.
D) If the directors failed to take action, the shareholders could have brought an action on behalf
of the corporation against Hollin.
E) The shareholders could proceed under the dissent procedure and force the corporation to buy
them out.
Answer: E
Skill: Applied
63) Mr. Malik, an investment counsellor by training, sat on the board of directors of Talbot
Enterprises Ltd., a broadly held corporation. During a meeting of the board, he advised the
corporation to buy some condominiums given the present soft real estate market. Malik did not
disclose that he owned shares in the corporation that owned the properties, nor did he disclose
that he would be entitled to a commission for every unit he helped sell. When the question was
put to the board, he voted in favour of it. Read each of the following statements separately, and
indicate which is true.
A) A director must disclose his interest in a contract before the board, but is not required to
refrain from voting for it.
B) A shareholder, learning of his actions, could proceed under the dissent procedure, which
would cause the corporation to buy his shares at fair market value.
C) Malik doesn't have to disclose his interest in the contract if he has signed an agreement with
the other directors relieving them of their fiduciary duties.
D) Malik has breached his fiduciary duty, but if the sale was fair, he need not give up his profits.
E) Malik must account for any profit made because he failed to disclose his interest and voted on
the question.
Answer: E
Skill: Applied
23
64) In the BCE case, the Supreme Court clarified the fiduciary duty owed by directors. Which of
the following correctly reflects the court's view in this case?
A) The duty is owed to the corporation; in determining what is in the best interest of the
corporation, directors may consider the interests of all stakeholders.
B) The duty is owed to the corporation and only the corporation; no consideration should be
given to shareholders, employees, or creditors.
C) The duty is owed to all stakeholders; the interests of shareholders, employees, and creditors
should be emphasized in all decisions.
D) The duty is owed to the corporation; in determining what is in the best interest of the
corporation, directors must consider the interests of shareholders.
E) The duty is owed to the corporation; in determining what is in the best interest of the
corporation, the directors must consider the interests of employees.
Answer: A
Skill: Recall
65) With regard to the law of corporations, which of the following is true?
A) A director of a corporation could not be personally liable on a promissory note even if he just
signed his own name, as long as at the time he had intended to sign on behalf of the corporation.
B) If a minority shareholder is treated unfairly, the appropriate relief to request is that the court
"lift the corporate veil."
C) In many jurisdictions, pre-emptive rights entitle a shareholder to pass on her right to vote to
someone else.
D) "Relief-from-oppression" provisions allow a party who has contracted with the corporation to
force the corporation to honour a contract it has signed in an irregular manner.
E) A creditor of a corporation could sue for some remedy if the directors of the corporation voted
for a resolution to pay a dividend when the corporation was insolvent.
Answer: E
Skill: Recall
66) Which of the following might be a successful claim (i.e., defence) if a director is charged
personally for violation of environmental regulations, resulting in pollution?
A) He did not participate in the decision leading to the offence.
B) He had delegated decision authority to someone else.
C) He had exercised due diligence.
D) He was not aware of the regulations.
E) He was not present at the meeting when the decision was made.
Answer: C
Skill: Recall
24
67) Which of the following statements is correct with respect to regulation of the purchase, sale,
and promotion of securities in Canada?
A) The federal government has no involvement in this area.
B) This is a provincial responsibility but all provinces have the same provisions.
C) Because of the location of the Toronto Stock Exchange, the Ontario Securities Commission
oversees these matters for all of Canada.
D) Canada has a federal securities regulator responsible for this.
E) This is primarily a provincial responsibility.
Answer: E
Skill: Applied
68) Four years ago, Ben Ratzi incorporated a corporation and became the sole shareholder,
director, and officer. He loaned the corporation $10 000 and took a debenture from the
corporation as security for repayment of the loan. The corporation prospered. Last year, your
brother began supplying the corporation with office supplies. He was paid at the end of each
month for supplies delivered during that month. For the last six months, however, he has not
been paid. He learned that other suppliers had not been paid either because sales dropped
drastically, apparently due to Ratzi's harsh management style, which has upset the entire staff.
Which of the following is true?
A) If Ratzi dies, his corporation would automatically die too, and there wouldn't be any person to
sue.
B) Your brother has no claim against the corporation because it has limited liability.
C) If this corporation were placed into bankruptcy, Ratzi would be in a better position than your
brother for receiving proceeds realized from the sale of the assets of the corporation.
D) Your brother could take an action under statutory "relief-from-oppression" provisions.
E) If your brother decided to sue for the debt, he could sue Ratzi because he was the sole
shareholder and his management style caused all of the trouble.
Answer: C
Skill: Applied
69) Often shareholders in closely held corporations want to formally set out their rights and
responsibilities with respect to each other that are not already included in the incorporating
documents. To best achieve this they have the following document prepared on their behalf:
A) a franchise agreement.
B) a partnership agreement.
C) a prospectus.
D) a receivership agreement.
E) a shareholders' agreement.
Answer: E
Skill: Applied
25
70) Mr. Ace of Oink Inc., a closely held corporation, is one of three shareholders. After several
years of considerable success, the corporation hit hard times. The other shareholders, Mr. Bane
and Mr. Curr, in the best interests of the corporation, voted Mr. Ace out as a director and voted
not to renew his employment contract. Upset by these events, Mr. Ace wanted to sell his interest
and leave the corporation. The other two shareholders, however, refused to buy his shares.
Furthermore, when Mr. Ace attempted to sell his shares to his brother, who was interested in the
corporation, the other shareholders refused to register the brother as a member. Which of the
following is true?
A) Mr. Ace could sue the corporation for breach of its fiduciary duty.
B) Mr. Ace could have avoided such a dilemma through the provisions of a shareholders'
agreement.
C) The court would "lift the corporate veil" because Mr. Bane and Mr. Curr were hiding behind
the corporation to commit a fraud.
D) Mr. Ace could sell his shares to whomever he chose and the remaining shareholders must
register the new owner.
E) Because of statutory pre-emptive right provisions, if Ace wants out, the other shareholders
must buy him out.
Answer: B
Skill: Applied
71) In a franchise arrangement, one business enters into a contract with another to sell its product
exclusively. Which of the following is true with respect to a franchise?
A) The franchisor, in addition to an initial sum of capital, is required to pay a substantial
franchise fee as well as regular payments to the franchisee.
B) The franchisee and franchisor are in partnership together.
C) The franchisor must comply with rules, standards, and specifications with respect to products
and prices.
D) A franchise arrangement is an effective way to expand the business.
E) The franchisee provides the product and other supplies and equipment.
Answer: D
Skill: Recall
26
72) Danny applied for and received a grant of licence to operate a popular franchise known as
"Paul Coffey's Coffee". As part of the application he was required to pay a significant franchise
fee that was loaned to him by his rich uncle. The building was "custom built" in accordance with
the franchisor's requirements. Danny also agreed as part of the franchise agreement to make
ongoing payments for management services and contributions to the cost of advertising
campaigns. Danny has a friend in Venezuela who agrees to ship him coffee beans at a bargain-
basement price. During the first day of operations, Danny receives a call from a representative of
the franchisor that there is a problem. As one might expect in these circumstances, the problem is
most likely:
A) his friend's coffee beans do not meet the requirements of food and drug regulations.
B) the coffee Danny is serving tastes slightly different than the brand usually served at "Paul
Coffey's Coffee."
C) Danny's friend was not named on the application for franchise as a potential supplier.
D) Danny's franchise agreement includes an exclusive supply agreement requiring Danny to
purchase coffee beans solely from the franchisor.
E) the coffee bean bags from Venezuela do the match the franchisor's colours.
Answer: D
Skill: Applied
73) In a franchise arrangement, one business enters into a contract with another to sell its
products exclusively. Which of the following is true with respect to a franchise?
A) The franchisee provides the technical expertise to manage the franchise.
B) The franchisor must comply with rules, standards, and specifications with respect to products
and prices.
C) Examples of franchises in Canada include Tim Hortons, KFC, and Budget Car Rental.
D) An advantage of a franchise arrangement is the equal bargaining position of the parties.
E) The franchisee and franchisor are in partnership together.
Answer: C
Skill: Recall
74) A sole proprietor is free from regulatory control.

Answer: FALSE
Diff: 1 Type: TF Page Ref: 203
Skill: Recall
75) The biggest issue for a sole proprietor is unlimited liability.

Answer: TRUE
Skill: Recall
76) A sole proprietor carries on business alone and cannot employ others in the process.
Answer: FALSE
Skill: Recall
27
77) A sole proprietor is responsible not only for his own conduct but also for the wrongful
conduct of any employee done in the course of employment.
Answer: TRUE
Skill: Recall
78) When the partners fail to register their partnership, they can neither sue nor be sued.
Answer: FALSE
Diff: 1 Type: TF Page Ref: 207, 208
Skill: Recall
79) A partnership is primarily a contractual relationship and can be created verbally or implied
by conduct.
Answer: TRUE
Skill: Recall
80) Chan sold a business to Scott and in the process they valued the "goodwill" at $50 000. In the
sale contract, it was agreed that this amount would be paid by Scott, giving Chan 15% of the
business profits until it was paid. This creates a partnership between them.
Answer: FALSE
Skill: Applied
81) An example of estoppel is when a person allows himself or herself to be called a partner.
Answer: TRUE
Skill: Recall
82) If Carol introduces Mary to a client as a partner in circumstances where it is reasonable for
the client to believe that there is a business relationship between them (although there is not),
Mary will not be able to deny it later if the client sues her as a partner because a partnership has
been formed by estoppel.
Answer: FALSE
Skill: Recall
83) Partners are vicariously liable for the wrongful acts of employees committed on partnership
business.
Answer: TRUE
Skill: Recall
28
84) Unlimited liability means that an investor can lose everything he or she has invested in a
corporation.
Answer: FALSE
Skill: Recall
85) The unlimited liability of partners means that not only can they lose their entire investment in
the business, but their personal assets (such as their homes and cars) are also at risk.
Answer: TRUE
Skill: Recall
86) The partners can change the terms of their responsibilities to each other in the partnership
agreement, but not in relationship to their obligations to third parties.
Answer: TRUE
Skill: Recall
87) Partners can agree among themselves as to what portion of liability they each will bear, and
their losses will be limited to that portion when being sued by outsiders.
Answer: FALSE
Skill: Recall
88) If three partners set out a term in their partnership agreement that John would only be
responsible for 10 percent of any losses, yet he has to pay 100 percent of a claim because the
other partners have no funds, John could seek contributions from the other partners according to
the partnership agreement.
Answer: TRUE
Skill: Recall
89) Changes to the Criminal Code in response to the Westray mining disaster in Nova Scotia
make partnerships and corporations more responsible for the negligence of their employees when
the negligence results in injury or death.
Answer: TRUE
Skill: Recall
90) Dennis, Sam, George, and Ray were partners in an accounting business, and Ray decided he
wanted to retire. He sold his share of the partnership to Leonardo, but Leonardo is not a partner
unless the other partners approve the change.
Answer: TRUE
Skill: Applied
29
91) It is possible through a partnership agreement to create different classes of partners.
Answer: TRUE
Skill: Recall
92) Shareholders in a closely held corporation can control the rights and responsibilities they
have to each other through a shareholders' agreement.
Answer: TRUE
Skill: Recall
93) A partnership enjoys tax advantages not available to a sole proprietor.

Answer: FALSE
Skill: Recall
94) A partnership can always be brought to an end by the service of notice on the other partners,
no matter what the partnership agreement says.
Answer: FALSE
Skill: Recall
95) A corporation is a fiction that does not exist in reality.

Answer: TRUE
Skill: Recall
96) A corporation is considered to be a separate legal entity from the shareholders who make it
up.
Answer: TRUE
Skill: Recall
97) There is one common method of creating corporations used across Canada.
Answer: FALSE
Skill: Recall
98) A broadly held corporation has fewer and less stringent reporting and accounting
requirements than a closely held corporation.
Answer: FALSE
Skill: Recall
30
99) Shareholders in a closely held corporation are entitled to sell their shares to whomever they
want without restriction.
Answer: FALSE
Skill: Recall
100) Preferred shareholders usually get preference when dividends are declared, but receive no
vote.
Answer: TRUE
Skill: Recall
101) If dividends are not paid, preferred shares usually convert to voting shares.
Answer: TRUE
Skill: Recall
102) Where a corporation borrows money, only the corporation is responsible for that debt, not
the shareholders.
Answer: TRUE
Skill: Recall
103) Where a corporation is not able to pay the debts it owes, the creditors can turn to the
shareholders for payment.
Answer: FALSE
Skill: Recall
104) A secured creditor has first claim against assets used as security.
Answer: TRUE
Skill: Recall
105) Shareholders do not owe a duty to the corporation.

Answer: TRUE
Skill: Recall
106) A shareholder has an obligation not to compete with the corporation.

Answer: FALSE
Skill: Recall
31
107) Shareholders have a right to bring an action against the directors on behalf of the company
when the directors fail in their duty to the corporation.
Answer: TRUE
Skill: Recall
108) Directors owe a fiduciary duty to the shareholders.

Answer: FALSE
Skill: Recall
109) Directors owe a fiduciary duty to the public.

Answer: FALSE
Skill: Recall
110) Directors owe a fiduciary duty to the corporation.

Answer: TRUE
Skill: Recall
111) A director can be held responsible for unpaid taxes, wages, and environmental harm.
Answer: TRUE
Skill: Recall
112) To protect directors from exposure to personal liability in the case of violations of statutes
related to the environment and competition, corporations often include terms in the directors'
contracts that provide indemnification for losses they incur and legal expenses associated with
involvement in these types of actions.
Answer: TRUE
Skill: Recall
113) The rights associated with preferred shares are always the same, and there is no actual right
to a dividend.
Answer: FALSE
Skill: Recall
114) If expected dividends are not paid to preferred shareholders, there is no right to sue
although those unpaid dividends will accumulate.
Answer: TRUE
Skill: Recall
32
115) Securities regulations are a federal responsibility.
Answer: FALSE
Skill: Recall
116) When a personal guarantee has been signed by a shareholder, the creditor can demand
payment from that shareholder despite the separate legal entity nature of the corporation.
Answer: TRUE
Skill: Recall
117) A franchisee and franchisor are considered to be in a partnership with each other.
Answer: FALSE
Skill: Recall
118) A franchisee provides the product, equipment, and a licence to use the name, trademark,
and logos.
Answer: FALSE
Skill: Recall
119) Distinguish between a sole proprietorship and a corporation.

Answer: A sole proprietorship is simply a person going into business on his or her own without
going through any formal process like incorporation. The owner is the legal personality. With a
corporation, people own shares in a separate legal personality called the corporation.
Diff: 1 Type: ES Page Ref: 204, 217
Skill: Recall
120) What are the advantages and disadvantages of being a sole proprietor?
Answer: Disadvantages: unlimited liability, only one person involved (although employees may
be hired), income is taxed at the personal tax rate. Advantages: little outside interference, not
accountable to others, record and reporting burden is lighter, fewer government regulations.
Diff: 2 Type: ES Page Ref: 204
Skill: Recall
121) Distinguish between a partnership and a corporation.

Answer: A partnership involves two or more people carrying on business in common with a
view to a profit, but no separate legal entity is created. With a corporation, people own shares in
a separate legal personality called the corporation.
Skill: Recall
33
122) Discuss the advantages and disadvantages of partnership as a method of carrying on
business compared to incorporation.
Answer: The main advantages of partnership are its ease of creation and the fact that each
partner has a veto over important decisions. Also, each partner participates in the management
process. The main disadvantage is unlimited liability. It is a simple matter in this question for
students to list the features of incorporation and partnership as outlined in the chapter and state
that those features are advantages and disadvantages depending on your point of view. But
students showing a good understanding will indicate that many of the advantages of
incorporation, like limited liability, are illusory (having to sign a personal guarantee), and that
many of the disadvantages of partnerships can be overcome either by a partnership agreement
between the partners or by acquiring adequate insurance.
Diff: 1 Type: ES Page Ref: 206,209,211,217
Skill: Applied
123) Discuss the role of the Partnership Act as it relates to people carrying on joint business
activities.
Answer: This question requires students to demonstrate an understanding of the Partnership Act.
They should indicate that each common law province has adopted a version of the Partnership
Act. They should indicate that it contains provisions that govern the activities of partners with
each other and the activities of those partners with outsiders. Unlimited liability is imposed on
partners dealing with outsiders for the commission of torts, for contracts entered into on the
partnership's behalf, and for breach of trust. It is important for students to show that such liability
to outsiders cannot be changed by the terms of a partnership agreement. As far as the relationship
between the partners, the Act sets out a number of responsibilities and obligations between the
partners. Examples are the fact that major decisions must be unanimous, and the requirement that
profits are to be shared equally. Students should explain others listed in the text. The important
point that must be explained is that many of these rights and obligations between partners listed
in the Partnership Act can be changed by the terms of a partnership agreement made by those
partners. Thus, there can be different classes of partners (senior and junior) who receive a
different share of the profits and who have different powers when important decisions are made.
They may also be given different roles with respect to participation in the management of the
partnership.
Diff: 2 Type: ES Page Ref: 210-212
Skill: Applied
124) "As in other forms of business, when decisions are to be taken, the majority of the partners
must approve the decision." Discuss the accuracy of this statement.
Answer: It is inaccurate. All of the partners must agree to such changes, in the absence of an
agreement to the contrary.
Skill: Recall
34
125) When two people enter into a partnership by agreement but neglect to set out the terms of
such agreement, or where the parties becomes partners inadvertently, where are the terms and
arrangements of that partnership set out?
Answer: Partnership Act
Skill: Recall
126) "A partnership can be created by the conduct of the parties." Discuss the accuracy of this
statement.
Answer: This is accurate. A partnership is defined as two or more people carrying on business
with a view to profits. It doesn't need an agreement and can be implied by conduct.
Skill: Recall
127) "For a partnership to exist, the parties must have consented to its creation." Comment on the
accuracy of this statement.
Answer: It is inaccurate. A partnership is defined as two or more people carrying on business
together with a view toward profit. Such a relationship can be created inadvertently.
Skill: Applied
128) Explain why the law of partnership poses a danger to people carrying on joint business
activities.
Answer: Here students must show that they understand that a partnership can be created
inadvertently. "People carrying on business together, trying to make a profit" is the definition of
a partnership. The danger is that the designation of "partnership" brings with it unlimited
liability. Students then would likely explain in what circumstances carrying on business together
would create a partnership. The courts will look to see if the activity is a business and if it is an
ongoing activity, not just a one-time combined effort. Then the court will look to see if the
parties are carrying it on together. The test here is whether the parties are sharing gross returns
from the business or the profits (the net return). If they are splitting fees or commissions, before
profits, that is not enough to create a partnership; however, if they are sharing the returns after
costs have been taken out, that is evidence of a partnership. Students should also point out that
the Partnership Act lists a number of activities (such as sharing income from the joint ownership
of real property or getting a profit-sharing bonus from work) that will not by themselves be
evidence of the existence of a partnership. This is most important when dealing with outsiders
who are trying to establish a partnership to impose liability on some party other than the one with
whom they have been dealing.
Skill: Applied
35
129) Joe and Mary promote several dances at school and split the profits. Will this be enough to
establish a partnership?
Answer: Yes. The definition of a partnership is two or more people carrying on business with a
view to profits. This is an ongoing activity, so it is a business, and they are sharing the profits, so
a partnership exists.
Skill: Applied
130) Joe sold Harry his barber shop for $100 000. He was paid $20 000 in cash, the other
$80 000 to be paid by Harry giving Joe 20% of the profits of the business until the amount is
paid off. Unfortunately, a customer, Sam, is injured by Harry, who manages to cut off Sam's
right ear while shaving him. Sam sues both Harry and Joe. Explain his likelihood of success.
Answer: There is no partnership here between Joe and Harry. Although Joe is receiving a share
of the profits, this is done to pay off the purchase price of the business and is one of the
exceptions listed in the Partnership Act.
Skill: Applied
131) Discuss the problem of liability with respect to partnership and how this difficulty can be
overcome if partnership is chosen as the method of carrying on business.
Answer: Partners have unlimited liability for their own torts and the torts committed by other
partners or employees of the partnership. Students should show that they understand that
unlimited liability means that each partner is responsible for the whole claim, so if one partner
doesn't have the funds to pay his part, the other partners will have to bear the whole burden, and
they can lose everything they have. Students should also point out that, in contract law, each
partner is an agent for every other partner, so they are responsible for any contractual liability
entered into by their partners or by employees exercising an agency function. Again, this is
unlimited liability. Partners are also responsible for the breach of trust of their partners.
An important aspect of this question is for students to point out that these problems of unlimited
liability can largely be overcome by having adequate insurance coverage. They should also point
out that more practical means of good management and careful selection of partners are
important. Students should also deal with the possibility of creating limited partnerships in some
situations. Good students may also mention the movement to create limited liability partnerships
in applicable cases in some jurisdictions.
Skill: Applied
132) Explain the liability of a partner for another partner's actions.

Answer: Each partner is vicariously liable in tort law for any torts committed by a partner in the
course of the partnership. Also, each partner is considered an agent of the other partners for the
purposes of contracts entered into by them.
Skill: Recall
36
133) Explain the limitations of the liability of partners for the acts of other partners.
Answer: Each partner has unlimited liability for the actions of the other partners done during the
course of the partnership, unless one of those partners qualifies as a limited partner. The liability
of such a limited partner is limited to the amount invested.
Skill: Recall
134) Joe entered into partnership with two others in the establishment of a real estate sales
agency. The other two, Sam and Harry, had considerable experience in the real estate business
but no money. Joe, on the other hand, had his own home and several significant assets, and
although he didn't have any experience in the real estate business, his monetary contribution
made him an equal partner with Sam and Harry. Unfortunately, Harry misused some trust funds
that had come into his care as a result of business, investing them in the business of one of his
sons rather than in an interest-bearing account. The business of the son went sour and the money
was lost. The client sued Harry, Sam, and Joe. Explain the legal position of Joe here.
Answer: Because Joe is a partner with the other two, he is responsible for the wrongful acts of
Harry, including this breach of trust. Because Sam and Harry have no money, the client will go
after Joe. Joe has unlimited liability and can lose his house and other assets to pay for the debt.
Skill: Applied
135) "Partners must make clear in their partnership agreement any limitations on authority they
wish to impose on each other when entering into contracts with outsiders." Discuss the accuracy
of this statement.
Answer: Partners cannot limit their liability to outsiders by so stating in their partnership
agreement. Such provisions can only affect the rights and obligations between the partners. Thus,
if the partners set out a term in their partnership agreement that a particular partner would only
be responsible for a certain percentage of any liabilities, that partner may still be required to pay
more than the specified percentage in the event of a claim against the partnership if the other
partners did not have funds. Then he could seek payment from the partners according to the
partnership agreement (but they may not have funds to pay him).
Skill: Recall
136) Explain what a retiring partner should do to ensure that he is no longer liable for the
company's obligations.
Answer: To avoid being liable for any future indebtedness, the retiring partner should take steps
to ensure that any customers are told of his retirement and that his name is no longer associated
with the partnership. Otherwise, he would continue to be liable on the basis of apparent
authority. Regarding old obligations and liabilities that occurred before he retired, the retiring
partner is still obligated. However, he should try to have the remaining partners agree to
indemnify him for any obligations that arise after he leaves.
Skill: Recall
37
137) The Partnership Act provides that no major decisions can be made that affect the nature of
the business itself without unanimous agreement of the partners. Provide three examples of
major decisions.
Answer: admitting a new partner, borrowing or investing money, dissolving the partnership,
embarking on a new business venture.
Skill: Recall
138) Explain how the principle of fiduciary duty works in a partnership relationship.
Answer: It is very important that students understand the nature of a fiduciary duty, and this
question requires them to demonstrate that understanding with respect to the agency relationship
as well as partnership. Since each partner is an agent of every other partner, he or she also has a
fiduciary duty to the partners. This duty includes acting in the best interests of the partnership;
making available to the partnership any business opportunities that come to a partner because of
his or her position; disclosing any conflict of interest; avoiding competition with the partnership;
not using partnership property for one's own purposes; accounting for all expenses, income, and
benefits received; etc. Since fiduciary duty was covered in the previous chapter, students may
include further details already learned about this concept when they studied agency.
Skill: Applied
139) Jones is a partner in a law firm in a small town, and he is also doing legal work out of his
home in the evenings for himself. Explain the rights of his partners in this situation.
Answer: Jones is in the business of practising law and that is what he is doing in the evenings,
so unless he has the consent of his partners, he is in violation of his fiduciary duty. In that case,
he would have to pay over the profits he makes to the partnership.
Skill: Applied
140) Joe, Sam, and Harry set up an accounting partnership in a small town. To earn money on
the side, Harry did some accounting for friends at night, for which he received a fee. When Joe
and Sam found out about this, they demanded that the fees received be paid into the partnership
business. Explain Harry's legal position.
Answer: Harry owes a fiduciary duty to the other two partners, and when he is carrying on
business as an accountant, he is acting in the partnership capacity. Therefore, he must pay over
these fees to the partnership.
Skill: Applied
141) Explain under what circumstances a partnership can come to an end.

Answer: Usually by notice, but it may be by the expiration of a specified time or because the
activity becomes illegal, or where one of the partners dies or becomes bankrupt or insane, or by
court order. However, it should be noted that partnership acts vary by jurisdiction and partners
may include provisions for dissolution in a partnership agreement that differ from the applicable
act.
Skill: Recall
38
142) If a person wants to invest in a partnership but avoid the obligations associated with
partnership, what can she do?
Answer: She can invest as a limited partner. To do this, she must not participate in the
management or business of the partnership, she must not allow her name to be associated with
the partnership, and she must register with the appropriate government official.
Skill: Applied
143) Discuss the principle of limited liability, why it arises in the law governing corporations,
and its significance.
Answer: This is a relatively straightforward question but an important one, since the principle is
at the heart of corporate law. Limited liability refers of course to the principle that shareholders
in corporations and limited partners in partnerships are not liable generally for the debts of the
corporation. Their liability is limited because they can lose only what they have invested in the
business; their whole personal fortune is not at stake. In partnership, the limited partner is a
creature of statute. Limited liability comes from the fact that the corporation is a separate legal
person from the shareholders who make it up. The debts and obligations incurred are the debts
and obligations of the corporation, not the shareholders. This was finally established in the case
of Solomon v. Solomon in 1897. Unlimited liability of course exposes the investor to claims for
all who have a claim against the business, whether that is because of problems in the operation of
the business or because of debts owed. Much of this problem can be solved with appropriate
insurance, and often the advantage of limited liability is lost when shareholders are required to
sign personal guarantees when the corporation borrows money. It is important that students put
the advantages and disadvantages of limited liability into perspective and show that they
understand that the advantages are often illusory.
Diff: 2 Type: ES Page Ref: 216, 220, 221
Skill: Applied
144) Joe and Sam set up an import/export business in partnership, but they need extra money.
Harry is invited to invest as a limited partner. Unfortunately, the business begins to lose money
because of the poor business sense of Joe and Sam. Harry has the business expertise to turn the
business around, or at least he thinks so. What would your advice be to Harry in these
circumstances?
Answer: Harry should be advised not to get involved in the management of the firm. If he does
so, he will become a general partner and lose his limited liability status.
Skill: Applied
145) Explain what must be done to create a limited partnership.

Answer: Limited partners invest in the partnership but do not participate in the management or
the business with the general partners. They can't let their surname be associated with the
partnership, and they have to register their limited partnership with the appropriate government
official.
Skill: Recall
39
146) Explain how a person's status as a limited partner could be lost.
Answer: If the limited partner fails to register, participates in the business or the management of
the business, or allows his surname to be associated with the partnership, he can lose his status as
limited partner.
Skill: Recall
147) "Partners in a limited liability partnership (LLP) are not liable for the liability of the
partnership." Discuss the accuracy of this statement.
Answer: This statement is not accurate. Professionals carrying on business through an LLP do
have limited liability, but this shield does not extend to liability caused by a partner's own
negligence, or by the negligence of someone under his or her control. Further, the limited
liability applies only to negligence. (See the applicable legislation in your province for further
details.)
Skill: Recall
148) Explain the significance of the determination that a corporation is a broadly held
corporation as opposed to a closely held corporation.
Answer: There are more significant reporting and accounting obligations on a broadly held
corporation. These corporations are usually traded on the stock exchange or involve a great
number of shareholders. A closely held corporation is more like an incorporated partnership with
fewer obligations of reporting and accounting.
Skill: Recall
149) Explain under what circumstances a shareholder will not be permitted to sell his or her
shares.
Answer: Closely held corporations usually have a prohibition against a shareholder selling his or
her shares to other parties without permission of the other shareholders.
Skill: Applied
150) Indicate the main disadvantages to incorporation.

Answer: In a closely held corporation, there are restrictions on the transferability of shares. A
broadly held corporation faces much more regulation and controls, requiring more reporting and
related expenses. Also, the power of shareholders in a large corporation is diluted due to the
large number of shareholders.
Skill: Recall
151) Explain the power of a minority shareholder in decision-making situations.

Answer: The majority prevails, and an outvoted minority shareholder has no say in the operation
of the business. This is an example of the tyranny of the majority.
Skill: Recall
40
152) Explain what is meant by a preferred share.
Answer: A preferred share is one where special rights and/or restrictions have been placed on
the share. Usually holders of preferred shares have a claim to a set dividend and no right to vote
unless that dividend is not paid.
Skill: Recall
153) Joe is a shareholder of XYZ Corporation, an extremely profitable corporation in the

software business, and was upset when the directors of the corporation refused to declare a
dividend again, putting the money back into research and development. Joe sued, along with
several other shareholders, claiming that there was no excuse for withholding dividends under
these circumstances. Explain the likely outcome.
Answer: A shareholder has no right to a dividend and Joe will lose this action.
Skill: Applied
154) What is the significance of a corporation being classed as a separate legal entity?
Answer: As a separate legal person, it is responsible for its own debts, liabilities, and other
obligations, thus creating limited liability for those behind the corporation. It does not die;
management and ownership are separated; it has the capacity to contract (with some exceptions);
and it can employ others, be an agent, or even be a partner.
Skill: Applied
155) Indicate three significant results of a corporation being classed as a separate legal
personality.
Answer:
1. limited liability
2. It doesn't die.
3. separate management and ownership
Skill: Recall
156) Indicate three advantages to incorporation.

Answer: limited liability; reduced taxes under some circumstances; ease of transferability; the
corporation does not end with the death or bankruptcy of a shareholder; the shareholders are free
to carry on their activities without obligation to the corporation; management is separated from
ownership; majority vote of the shareholders prevails
Skill: Recall
157) Explain what is meant by limited liability related to corporations.

Answer: In a corporation, the corporation itself, not the shareholders, is responsible for the
debts, liabilities, and obligations of that corporation. The shareholder can only lose what he or
she has invested.
Skill: Recall
41
158) Explain "lifting the corporate veil."
Answer: This is where the courts will look to impose responsibility on the shareholders of a
corporation as opposed to the normal situation where liability is limited to the corporation itself.
This is usually restricted to situations where the corporation is being used by a shareholder to
commit a crime, fraud, etc.
Skill: Recall
159) "In modern business practice, the shareholders of a corporation own that corporation."
Explain the accuracy of this statement.
Answer: A corporation is a separate legal person. The shareholders do not technically own the
corporation or its assets. Shareholders make up the membership of the corporation and have
certain rights to control it through voting and have a claim against the assets upon dissolution. In
a practical sense, however, this usage is correct.
Skill: Applied
160) Joe is an environmental activist and he acquired shares in MacMillan Bloedel (a forestry
corporation), only for the purpose of undermining MacMillan Bloedel, speaking against its
practices at annual shareholders' meetings, and getting access to confidential information. Joe
spoke against MacMillan Bloedel at every opportunity. Explain his legal obligations to the
corporation under these circumstances.
Answer: He has none. As a shareholder, he is free to speak against the corporation if he so
wants.
Skill: Applied
42
161) Contrast the obligations and duties of directors and shareholders of a corporation.
Answer: Basically, the shareholders of a corporation owe no duty to the corporation or to other
shareholders. This is one of the major advantages of a corporation. The shareholder is free to
compete with and even try to destroy the corporation and there can be no complaint from the
corporation or the other shareholders. The only duty that may arise is where the shareholder
owns enough shares to be classed as an insider, and then there is an obligation under the
securities regulations not to use insider knowledge in trading shares of the business. Other duties
may be created by a shareholders' agreement between the shareholders when a small or private
corporation is created.
As far as the directors are concerned, they have a significant duty to the corporation to act in its
best interest and to act competently as a reasonably prudent business person. This is a fiduciary
duty, and it is owed to the corporation, not to the other shareholders, although the shareholders
(even a minority shareholder) have the right to bring a representative (derivative) action on
behalf of the corporation against a director who breaches that duty, when the other directors fail
to do so. The directors have other duties as well. These are imposed by statute and relate to
obligations with respect to the environment, to withholding taxes and other payments to
government bodies, to paying wages to employees, as well as obligations with respect to
consumer protection legislation, human rights, and other statutes that put penalties on the
directors for violations of the corporation in these areas. Students should take this well beyond
the recognition that the shareholders have little duty and the directors have significant duties.
Skill: Applied
162) Explain under what circumstances a shareholder's right to dissent arises.

Answer: A shareholder's right to dissent arises where a corporation, usually in the form of the
directors, makes a decision that will have the effect of benefiting the corporation as a whole, but
won't particularly help the position of a minority shareholder. In some jurisdictions, that minority
shareholder has the right to dissent, and to have his or her shares purchased at a fair price.
Skill: Recall
163) Explain under what circumstances a shareholder's right to sue against oppression arises.
Answer: A shareholder's right to sue against oppression arises where the directors of the
corporation make a decision with the objective of hurting the position of the minority
shareholder as opposed to benefiting the rest of the corporation. This is an abuse of their
position, and the minority shareholder can sue for relief from oppression. The power of the
courts in these circumstances extends to putting the corporation into receivership or having it
dissolved.
Skill: Recall
43
164) Explain what is meant by pre-emptive rights.
Answer: Depending on the legislation and the jurisdiction, a shareholder has the right to
maintain his percentage of the shares outstanding from a corporation. This means that if new
shares are issued, he has to be offered an amount whereby he will maintain his share of the
overall shares outstanding, if he purchases them.
Skill: Recall
165) If a director fails in his duty to the corporation, what rights does a minority shareholder
have to hold him accountable?
Answer: The minority shareholder can bring a derivative (representative) action on behalf of the
corporation to hold the director accountable for his breach of duty.
Skill: Recall
166) Explain the standard of care that a director must live up to in carrying out his duty toward
the corporation.
Answer: A director must exercise the care, diligence, and skill of a reasonably prudent person in
carrying out his or her director responsibilities. Note that this will vary with the jurisdiction.
Skill: Recall
167) To whom does the director owe the duty to be careful?

Answer: to the corporation itself
Skill: Recall
168) Explain the nature of the director's duties to the corporation.

Answer: A fiduciary duty is owed, in that the director must act in the best interests of the
corporation, not taking any advantage of corporate opportunities for himself or herself, and must
not act negligently in carrying out his or her direct responsibilities.
Skill: Recall
169) Based on the clarification provided by the Supreme Court of Canada in the BCE case,
explain the fiduciary duty owed by directors.
Answer: The court made it clear that the duty of the director is owed only to the corporation.
However, the court did point out that in determining what is in the best interest of the
corporation, the director may take into consideration the interests of all stakeholders involved,
including shareholders, employees, and creditors.
Skill: Recall
44
170) Discuss appropriate measures that a business might take to prevent and detect corporate
fraud.
Answer: A business might appoint a loss prevention team to focus on this problem. Part of the
effort should involve a comprehensive system of audits of financial matters as well as other
aspects of the business, such as the use of computers and other company resources. Management
needs to be vigilant in assessing risk and developing proactive strategies to avoid it.
Implementation of strong ethical standards, a code of conduct, and related training of all staff
would help to avoid internal fraud.
Skill: Applied
171) Discuss and contrast the various methods of financing a corporation. Deal with the
advantages and disadvantages of each.
Answer: There are two main methods of financing for a corporation. Equity financing involves
the sale of shares to investors. A company is incorporated with an authorized share capital and
then a portion of those authorized shares are issued to investors. In most jurisdictions, no value is
put on these shares when issued and the market determines their worth. In a closely held
corporation, shares are usually sold directly to the participants in the business. Shares can take
various forms, including preferred shares or other shares with special rights and restrictions
attached to them, or simply the normal issuing of common shares. When people buy shares, they
invest in the business, and the corporation does not owe them any funds. This is true even of
preferred shares where the corporation has committed to pay specific dividends. That is not owed
in the normal sense.
The other method of finance is debt financing where money is loaned to the corporation by
creditors. Again, this can be done directly with a simple loan from a bank or other finance source
that would likely be secured, but the corporation can also be financed through bonds or
debentures. These are like shares and are sold on the bond market, but each represents a share of
debt owed by the corporation. Of course, if the corporation fails to honour its legal obligation to
repay this debt, the creditors can enforce their claim against the assets of the corporation by
obtaining judgment and executing that judgment. Usually there are contractual provisions that
allow the creditors to take over the company in the event of default (receivership) without first
seeking judgment.
There are many different variations and combinations of these methods, and students should at
least demonstrate an understanding of the primary distinctions and the implications for the
corporation.
Skill: Applied
45
172) Explain the regulation environment in Canada related to the purchase, sale, and promotion
of shares and other financial vehicles (i.e., securities).
Answer: Canada does not have a federal securities regulator (as does the United States). Other
than the Criminal Code provisions, there is little federal involvement related to these activities.
This is a provincial responsibility. The Toronto Stock Exchange is the main place where shares
are sold in Canada, so the Exchange and the Ontario Securities Commission hold primary
responsibility to detect and prosecute wrongdoing that affects that market. However, each
province has legislation and securities commissions to regulate these activities. Provincial
regulations are in the form of consumer protection legislation, designed to protect investors.
Currently, efforts are under way to coordinate the various provincial regulations so they would
have common provisions.
Skill: Recall
173) Describe the advantages offered in a franchise arrangement to the franchisee.

Answer: The franchisee gets the advantages of corporate advertising, the use of a (hopefully)
high-equity brand name and/or logo, access to a supplier network, a "winning" business formula,
and perhaps even financing from the franchisor.
Skill: Recall
174) Descrive the advantages offered in a franchise arrangement to the franchisor.

Answer: The franchisee must pay a (usually substantial) franchise fee, regular payments to the
franchisor, and often a percentage of the profits generated. Additionally, the franchisor often
supplies the accounting system to the franchisee (thus offering a high degree of direct control
over the franchisee by the franchisor). Finally, the relationship between franchisor and franchisee
tends to be an unequal one whereby the larger franchisor organization will dominate
negotiations.
Skill: Recall
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Legal Fundamentals For Canadian Business Canadian 4th Edition Yates Test Bank

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Legal Fundamentals For Canadian Business Canadian 4th Edition Yates Test Bank

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Legal Fundamentals for Canadian

Business Canadian 4th Edition Yates

1) Which of the following is correct with respect to sole proprietorships?

6) Which of the following statements best describes a partnership?

15) Which of the following will establish the existence of a partnership?

22) Which of the following is correct with respect to partnership?

31) Which of the following is an example of a breach of a fiduciary duty?

33) Which of the following is a violation of the fiduciary duty of a partner?

40) Which of the following is correct with respect to limited partnerships?

45) Which of the following is considered to be a separate legal person in law?

50) Which of the following is an advantage of incorporation?

58) Which of the following is a fiduciary relationship?

59) In which of the following relationships is a fiduciary duty owed?

74) A sole proprietor is free from regulatory control.

75) The biggest issue for a sole proprietor is unlimited liability.

93) A partnership enjoys tax advantages not available to a sole proprietor.

95) A corporation is a fiction that does not exist in reality.

105) Shareholders do not owe a duty to the corporation.

106) A shareholder has an obligation not to compete with the corporation.

108) Directors owe a fiduciary duty to the shareholders.

109) Directors owe a fiduciary duty to the public.

110) Directors owe a fiduciary duty to the corporation.

119) Distinguish between a sole proprietorship and a corporation.

121) Distinguish between a partnership and a corporation.

132) Explain the liability of a partner for another partner's actions.

141) Explain under what circumstances a partnership can come to an end.

145) Explain what must be done to create a limited partnership.

150) Indicate the main disadvantages to incorporation.

151) Explain the power of a minority shareholder in decision-making situations.

153) Joe is a shareholder of XYZ Corporation, an extremely profitable corporation in the

156) Indicate three advantages to incorporation.

157) Explain what is meant by limited liability related to corporations.

162) Explain under what circumstances a shareholder's right to dissent arises.

167) To whom does the director owe the duty to be careful?

168) Explain the nature of the director's duties to the corporation.

173) Describe the advantages offered in a franchise arrangement to the franchisee.

174) Descrive the advantages offered in a franchise arrangement to the franchisor.

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