APPLY YOUR KNOWLEDGE

(WEEK 2 – FORMS OF BUSINESS ORGANIZATION)

Read the following case scenario and answer the questions presented

SOLE PROPRIETORSHIP

Charles was a carpenter with a large homebuilder in Toronto. He is married to a teacher and has two teenage children. Charles and his wife own their own home that is registered jointly in their names and each owns a car. They also have a joint bank account and Canada Savings Bonds that are registered in both their names.

Last year, he quit his full-time job, got a part-time job at the Home Depot and started a home renovation business as a sole proprietor that he operates under the name The Reliable Renovation Company. Although he lost money in 2004, Charles intends to eventually expand into the home construction business and hopefully leave a thriving business to his children.

1. Does Charles have to do anything to establish his sole proprietorship?

2. What are the advantages to Charles of operating this business as a sole proprietorship?

3. a. What are the disadvantages of operating this business as a sole proprietorship?

b. What can Charles do to reduce these disadvantages? GENERAL PARTNERSHIP

Charles, at the end of 2004, came to the conclusion that if his business is to be successful he would require more money. He also realized that although he had carpentry skills he knew very little about marketing, accounting and architecture. In January, therefore, he approached three employees of his former employer who had been laid off: Mary, an architect, Bob, an accountant and Jane, a marketing manager and suggested that they form a general partnership. Everyone felt this was a great opportunity and a simple partnership agreement was entered into. Under the terms of the partnership agreement, each agreed to make the following financial

contributions to the partnership:

Charles the assets of the sole proprietorship worth $50,000Mary $25,000 cashBob $25,000 cashJane $50,000 cash

They also agreed that no partner would enter into any contract over $1,000 without the consent of all other partners.

The partnership has only been operating for a short time butproblems are already beginning. Jane, without the knowledge of herpartners, has entered into a $5,000 advertising contract with a local

newspaper. Charles has caused some serious fire damageto the home of a customer when rags he used to stain somehardwood floors ignited through spontaneous combustion. Mary

has been using money paid by customers as deposits on renovationwork to gamble at Casino Niagara.

1. a. Who is legally responsible to the newspaper for the advertising contract? Why?

b. Who is legally responsible to the homeowner for the fire damage? Why?

c. Who is legally responsible to the customers for the deposits? Why?

In addition, there have been some disputes on how the profits of business are to be shared. Charles and Jane are claiming that they are entitled to draw twice as much of the profits as Bob and Mary since they contributed twice the amount of capital. It has also been discovered that Charles has been doing some renovation work on the side for some of his old customers and pocketing the money.

2. Are Charles and Jane correct? (explain your answer)

3. Is Charles allowed to do this outside work? Could the other partners expel him from the partnership? (explain your answer)

Recently, there has been talk amongst the partners regarding the expansion of the business into the home construction business. Charles, Bob and Jane support the idea but Mary is totally opposed and has threatened to force a dissolution of the partnership unless

they agree to buy her out.

4. Is the support of Mary required to pursue this expansion?(explain your answer)

5. If the other partners buy out Mary what legal steps shouldshe take to protect herself on retirement from the partnership?

6. If the other partners will not buy Mary out, could she sell her partnership interest to an outsider? (explain your

answer)

7. Can Mary force a dissolution of the partnership as she threatened? (explain your answer)

8. How could many of the problems experienced in this partnership have been avoided? (explain your answer)

CORPORATION

Charles, Bob and Jane decide to buy out Mary. The buy out is completed by Bob buying Mary’s partnership interest for $25,000 so that all three will have invested $50,000 into the business. They intend to implement their expansion plans by purchasing a tract of land and building a small subdivision. A financial analysis has indicated that although such a project is risky and will require a million dollars in additional capital, it has the potential of generating substantial profits because of the hot real estate market.

Before proceeding, however, their accountant has recommended that they form a corporation and sell the partnership assets to the new corporation. They have all agreed to this suggestion but have made it clear that they all wish to have a say in corporate decision-making and to take an active role in the day to day operations of the corporation. They also insist that their shareholdings in the new corporation must reflect each of their present financial interests in the partnership.

1. Why would incorporating the business be better than continuing as a general partnership?

2. If they choose to form an Ontario corporation what legal procedure must they follow?

3. Who will be the first directors of the corporation and who will be the officers of the corporation? (explain your answer)

After the corporation was formed, Bob was delegated the task of finding a suitable piece of property for the development. Within a few days, he learned of a farmer who was considering selling his farm. On investigation, it turned out to be such a good deal that Bob decided not to tell the others about the property and to purchase it for himself as an investment. Several weeks later, he recommended to his fellow directors a property owned by his recently deceased uncle that was being sold to settle the estate in which Bob was a beneficiary. Bob did not tell the others about his connection to the property.

6. Did Bob act properly? (explain your answer)

Disappointed by Bob’s conduct, Jane and Charles have decided that they want Bob out of the business.

7. Could Jane and Charles remove Bob as a director of the corporation? (explain your answer)

8. Could Jane and Charles remove Bob as an officer of the corporation? (explain your answer)

9. Is Bob entitled to receive dividends? Is Bob entitled to receive a salary? (explain your answer)

10. Can Bob sell his shares to an outsider? (explain your answer)