BLaw Chp 6

38. Before shares in a public corporation are offered for sale to the public, the incorporators or the corporation must prepare and distribute a document called

d. a prospectus.

1. In a sole proprietorship there is no legal separation between the person and the business.

True

11. If the people who created a corporation die, the corporation continues to exist.

True

13. Directors are elected by shareholders and must report to shareholders at regular shareholders' meetings.

True

14. A share certificate is a document that represents the ownership of shares in the corporation.

True

15. By signing a personal guarantee, a shareholder may undermine the protection against liability that incorporation offers.

True

17. A unanimous shareholders' agreement allows a private corporation to enjoy the flexibility that a partnership offers, while still taking advantage of the benefits of incorporation.

True

19. An agent acts on a principal's behalf in an interaction with a third party and affects the legal position or interests of the principal.

True

2. A sole proprietorship is created as soon as someone opens a business that interacts with the public.

True

22. Agents may have more than one principal.

True

4. The partners in a partnership may be individuals, corporations, sole proprietorships, or other partnerships.

True

7. A limited partnership has one or more general partners and one or more limited partners.

True

39. You, the owner of a business, tell your sales agent that he is not authorized to offer discounts to customers. Your agent negotiates a contract with a customer that involves a discount.

d. The contract may be enforceable if the customer is allowed to assume that your agent has real authority.

45. Briefly describe the legal characteristics of a general partnership.

A general partnership is not an independent legal entity. It cannot, therefore, enter legally binding contracts or protect its owners (the partners) from legal liabilities for injuries (either physical or financial) caused by the firm. As a result, the individual partners in a general partnership are jointly and severally liable for the actions of the firm. This means that they divide liability equally, and are also each entirely liable for the firm's actions. If you decide to run your business as a general partnership, you may be liable for the conduct of each of your partners. The law views you as representing — or as acting as an agent for — both the firm and each of your partners individually. As a result, if one of your partners makes a serious error that harms a client, you and every other partner in your firm could be legally responsible for compensating the client for all losses that result from the error. As in the case of a sole proprietorship, each partner may be liable to the full extent of her personal assets for all debts and other obligations of the partnership. This means that you could lose your home, your investments, and all your savings if any of the partners in your farm makes a serious error.

49. What are the consequences if a limited partner assumes management responsibilities?

A limited partner who assumes management responsibilities will lose the limited liability status and become a general partner — with full risk of liability.

50. What is the crucial difference between a general partnership and limited liability partnership?

In a limited liability partnership a partner is not liable for the professional negligence of the other partners.

47. What is joint and several liability?

Joint and several liability is financial responsibility requiring all parties to contribute equally but also making each party responsible for the entire amount owed.

53. What is the most important advantage of using a corporation to operate a business?

The most important advantage is the protection it provides to shareholders, employees, officers, and directors from personal liability for the debts and obligations of the business.

31. A limited liability partnership may be attractive to lawyers and accountants because

a. they are not legally permitted to form corporations to practise their profession. b. it avoids the disadvantage of unlimited liability for all partners. c. partners are not liable for negligent acts or omissions of other partners in the firm. d. all of the above All of the above

42. A franchise agreement may be made between

a. two sole proprietorships. b. a sole proprietorship and a corporation. c. a sole proprietorship and a partnership. d. all of the above All of the above

36. Which of the following is not a way directors and officers of a corporation may be subject to liability?

b. Being held personally liable for debts of the corporation if it is forced into bankruptcy.

30. An advantage of a general partnership over other types of partnerships is

b. flexibility and simplicity.

35. The "minds" of the corporation are

a. the directors.

56. What is the purpose of a prospectus?

The purpose of a prospectus is to ensure that any member of the public who is contemplating spending his money to purchase shares in the corporation has sufficient reliable information about the corporation, its financial health, and its future prospects to make the decision wisely.

21. All partners are agents of their partnership.

True

23. Issues of concern with respect to joint ventures include how to share profits or losses and how to deal with liabilities.

True

55. What is "due diligence" with respect to liability?

"Due diligence" is a defence to personal liability, which can be used if the officer or director can prove that he or she did all that was reasonable in the circumstances to ensure that the corporation acted responsibly. This defence of due diligence can be supported by evidence of corporate policies and procedures in place to prevent such events.

57. What is a "franchise"?

A franchise is a right to operate a business using the name, products, business methods, and advertising of another business.

43. Briefly describe the legal characteristics of a sole proprietorship.

A sole proprietorship has no legal existence apart from its owner. It therefore cannot sue another individual or business, nor can it be sued on its own behalf. The owner is the legal entity that must sue on behalf of the business, and that will be sued for the misdeeds of the business. A sole proprietorship cannot enter contracts; rather, its owner enters contracts on its behalf and is responsible for fulfilling any contractual obligations related to the business. It does not file its own income tax return; instead, its owner claims income derived from the business and deducts business expenses on her personal tax return.

27. In a general partnership,

d. all partners are jointly and severally liable for each others' debts and negligence.

41. Businesses that come together under a joint venture

c. part ways at the end the project with no impact on their individual legal status.

54. What is directors' and officers' liability and why is it significant?

Every director and officer of a corporation must use reasonable care, diligence, and skill in the course of carrying out their duties, or face liability for breach of fiduciary duty of care. Generally, it is not enough for a director or officer to say that she tried her best; she must be seen to act as responsibly as a reasonable officer or director would act. Directors and officers also have obligations, and are subject to liability, under legislation intended to protect the public — such as environmental protection statutes and workplace statutes that protect employees. This liability can be substantial, such as hundreds of thousands of dollars in fines, and even prison terms.

10. The oppression remedy allows partners to apply to the court to enforce the terms of the partnership agreement.

False

12. Shareholders owe a fiduciary duty that requires that they put the corporation's interests before their own personal financial interests.

False

16. A shareholder, or group of shareholders, "own" the corporation if they hold a majority of the corporation's shares.

False

18. A "prospectus" is a document that usually must be filed with the articles of incorporation of private corporations.

False

20. If an agent is made aware of the scope of his or her authority, the principal is unlikely to be found liable for contracts made with third parties outside the scope of authority.

False

24. A franchise is a chain of stores all owned by the same corporation, using the same name, and selling the same products.

False

3. The name of a sole proprietorship must be registered with the Provincial Government.

False

5. Partnerships are legally independent from the people who compose them.

False

6. A limited liability partnership can be used as a method of raising capital from a silent investor.

False

8. Unlike general partnerships, limited partnerships and limited liability partnerships are legal entities separate from the partners.

False

9. A partnership agreement is required to give a partnership the status of a separate legal entity.

False

44. Identify and describe an advantage and disadvantages of running a business as a sole proprietorship.

a. Cost and complexity: Simplicity is the key advantage of carrying on business as a sole proprietorship. You may require business and other licences required by the municipality in which you operate, but you have no other requirements to fulfill. You can decide to open a business, and be up and running almost immediately as a sole proprietor. You can make important decisions about your business easily — without changing documentation, obtaining approvals, or consulting others. b. Taxation implications: The tax department treats a sole proprietorship as a source of income (or as a business loss) for its owner. Any profit (income minus legitimate expenses) earned by the business is added to the total income of the owner for income tax purposes. On the other hand, losses incurred by the business can be set off against the owner's income from other sources in order to reduce tax. In other words, the tax department simply treats income from your sole proprietorship as another source of your personal income, alongside income from employment, property, or investments. Like other types of business, a sole proprietorship allows you — as owner — to employ people, including members of your family. This can work as an income-splitting arrangement, giving you an opportunity to save tax by diverting income from your pocket to that of a family member who pays tax at a lower rate than you do. In this manner, your business income stays in your family, and may be subject to lower tax rates. c. Liability issues: The main disadvantage of choosing to operate a business as a sole proprietorship is the legal liability of the owner. Because the owner and the business are one in the eyes of the law, the owner is legally liable for any injury (whether physical or financial) that the business may cause to others. This means that the owner is personally subject to unlimited liability. Because your sole proprietorship is unable to enter contracts, you— as owner— become responsible for all contractual obligations of your business, and you become personally liable for any breaches of contract. d. Considerations concerning expansion: Only one person can own a sole proprietorship. If the business expands significantly — or if it requires an infusion of money to continue to operate or to expand — the owner may wish to bring other individuals in as co-owners. In order to do this, it is necessary to convert the business to a structure other than a sole proprietorship: either a partnership or a corporation.

46. Identify and describe a major advantage and disadvantage of running a business as a general partnership versus a limited liability partnership.

a. Cost and complexity: The general partnership has the advantage of simplicity when smaller groups of people choose to work together. A general partnership is easy to set up and easy to run. As long as it remains small, its operations can be flexible. The limited partnership is a more complex organization than the general partnership, and it requires more documentation. For example, the Limited Partnerships Act in Ontario requires that a current record of the limited partners be kept on the premises, and made available for inspection by the public. This record includes names and contact information of all limited partners, and the amount of money or value of property contributed to the partnership by each limited partner. b. Tax implications: Like the sole proprietorship, any kind of partnership allows business profits to flow into the personal income of its owners — the partners — for the purpose of income tax. The firm keeps accounts of its income and expenses in order to calculate its annual profit (or loss). The profit (or loss) is then apportioned to each partner either equally, if there is no provision to the contrary in the partnership agreement, or unequally in accordance with the terms of the agreement. Each partner then includes her share of the firm's profits as business income in her own personal tax return. The tax implications for a limited partnership are substantially the same as for a general partnership. The partnership's financial information is combined with the partners' personal finances to calculate taxes. c. Liability issues: The biggest disadvantage of the general partnership is general liability. Each partner is personally liable for the debts and obligations of the firm. Each partner's liability is limitless, which means that each partner will have to honour the firm's obligations until all her assets are depleted. This liability exists even if the firm is sued as a result of a single partner's error. In this regard, every partner acts as a sort of insurer for the mistakes of the others. Limitless liability may be less of a concern in a two-person firm, where the partners trust and are able to monitor each other, than in a larger firm. Of course, the larger the firm, the more partners there are to share the cost of mistakes. Where the general partners have unlimited liability for the debts and obligations of the partnership, the liability of the limited partner is usually limited to his investment in the firm. d. Considerations concerning investment: A limited partnership has many of the advantages of a general partnership. It has the additional advantage of allowing people to become involved in the business without assuming the risks or responsibilities of a full general partner. This increases the firm's ability to attract investors, or "silent partners," as an inexpensive and low-risk method of obtaining capital.

48. List three steps you can take to reduce your risk when entering a partnership.

a. Know the people with whom you enter a partnership. b. Ensure that their personal ethics, professional abilities, and styles of doing business accord with your own. c. Register your partnership's name if it differs from the personal names of the individual partners. d. Carry sufficient insurance to cover whatever liabilities are likely to arise in the course of doing business. e. Create a partnership agreement to ensure that your expectations and those of your partners are in accord.

58.. List five terms typically found in franchise agreements.

a. The requirement that the franchisee sell only products supplied by the franchisor, in the form in which they are supplied, to the standards set by the franchisor; b. The requirement that the franchisee set up and decorate the business premises exactly as required by the franchisor so that the outlet resembles all other franchises; c. The requirement that the franchisee pay both an initial franchise fee and a periodic royalty to the franchisor, often a percentage of the profit of the franchise; d. The requirement that the franchisee provide audited financial statements to the franchisor on a regular basis; e. The requirement that the franchisee contribute a certain amount of money to the franchisor's advertising fund, which the franchisor then uses to advertise the franchise across its territory (national, provincial, or local); f. The requirement that the franchisee offer specials and discounts only as directed by the franchisor; g. The requirement that the franchisee limit her business to a given territory (when, for example, delivering fast foods); h. The requirement that the franchisee maintain the business premises, the service offered to the public, and the products offered for sale to the standards of the franchisor; i. The requirement that the franchisee establish and maintain sufficient liability insurance on the business and protect the franchisor from any legal liabilities that may arise; j. The requirement that the franchisee participate in any group scheme or organization that the franchisor might set up (for example, the central call centre of a pizza business); and k. An acknowledgment that the franchisor may, at any time, revoke the franchise agreement if the franchisee fails to live up to any of her obligations under the agreement.

37. An enforceable contract designed to govern how the corporation will be managed and operated is referred to as

a. a shareholders' agreement.

28. A limited partner does not risk opening herself up to liability as a general partner when

a. acting as an agent in circumstances described in the partnership agreement.

26. Without its owner, a sole proprietorship may

a. enter into contracts. b. may sue other individuals or businesses. c. file an income tax return. d. none of the above None of the above

25. Which of the following business structures would be considered the least expensive or complex to set up and run?

a. general partnership

40. An agency relationship

a. may be implied from the circumstances. b. may exist from past behaviour. c. is established with a formal agency agreement. d. all of the above All of the above

34. Which of the following persons of a corporation would owe a fiduciary duty?

a. president b. chief operations officer c. director d. all of the above All of the above

33. The owners of a corporation are

a. the shareholders.

32. Which type of partnerships requires a partnership agreement?

b. limited Liability Partnership