CH 3 - BUSINESS LAW

Question 1

Is a sole proprietorship a business structure ?

Answer 1

A sole proprietorship is not actually a business structure; rather, it comes into existence as a matter of law when individuals start operating a business on their own account.

Question 2

Must a sole proprietor perform all contracts and obligations related to normal operations of the business ?

Answer 2

Yes.

[The business can carry out all kinds of activities, but it is inseparable from the sole proprietor, in both legal and tax terms.]

Question 3

In what specific situations is a sole proprietorship terminated ?

Answer 3

• Death of the sole proprietor
• Incapacity of the sole proprietor
• Withdrawal of the sole proprietor
• Bankruptcy of the sole proprietor

Question 4

What must you consider to determine if a sole proprietorship is a suitable business structure for your client ?

Answer 4

• Cost and time required for regulatory requirements
  *Desire for control.
• Working capital required and available.
  *Need to obtain financing
• Probability of liability
• Income expectations
• Expectation for business growth
• Survival of the business (after incapacity, death, or disposition)
• Number of employees

Question 5

What is a partneship ?

Answer 5

A partnership is a relationship between two or more individuals, or partners, carrying on a business in common, with the goal of making a profit.

Question 6

Is a partnership a seperate legal entity from the partners ?

Answer 6

A partnership is not a separate legal entity from the partners. Therefore, the partners are responsible for the actions taken by the business.

They also share in the profits and losses of the business.

Question 7

What are the 3 types of partnerships ?

Answer 7

• General
• Limited
• Limited liability

Question 8

What is a GP ?

Answer 8

A general partnership, often referred to as a firm, forms a relationship between various entrepreneurs carrying on a
business in common for profit. A partnership is unlike the relationship formed between members of an incorporated
company.

Question 9

What is a LP ?

Answer 9

A limited partnership is a hybrid between a partnership and a corporation that is created by provincial legislation.
In Ontario, for example, the Limited Partnership Act sets out the requirements for creating a limited partnership.

[Formed by filing forms with the provincial government]

Question 10

What are the two types of partners that an LP can have ?

Answer 10

General partner & Limited partner.

Question 11

What is a limited partner allowed to do ?

Answer 11

The limited partner is allowed to contribute property, but not participate in the management of the partnership.
Limited partners are not agents of the firm and cannot bind the firm. The Partnership Act restricts the liability of
each limited partner to the amount of money or property that the partner has contributed or agreed to contribute.

Question 12

What is a general partner allowed to do ?

Answer 12

A general partner in a limited partnership has all the rights and powers, and is subject to all the restrictions and
liabilities, of a partner in a partnership without limited partners.

Question 13

What does a GP not have authority to do without written consent or ratification of a specific act that binds all limited partners ?

Answer 13

• Act in contravention of the partnership agreement.
• Act in a way that makes it impossible to carry on the ordinary business of the limited partnership.
• Consent to a judgment against the limited partnership.
• Possess limited partnership property, or assign any rights in specific partnership property, for other than a partnership purpose.
• Admit a person as a general partner.
• Admit a person as a limited partner, unless the right to do so is given in the partnership agreement.
• Continue the business of the limited partnership upon the death, retirement, or mental incompetence of a
  general partner or dissolution of a corporate general partner, unless the right to do so is given in the partnership
  agreement.

Question 14

What rights does a Limited partner have ?

Answer 14

• Inspect and make copies of, or take extracts from, the limited partnership books at all times.
• Receive, upon demand, true and full information concerning all matters affecting the limited partnership.
• Receive a complete and formal account of the partnership affairs.
• Obtain dissolution of the limited partnership by court order.

Question 15

A partnership will terminate under various situations, including the following occurrences ?

Answer 15

• Death of a partner
• Incapacity of a partner
• Withdrawal of a partner
• Bankruptcy of a partner

Question 16

When can an LP continue and not dissolve, if a partneship is terminated due to a situation with the GP ?

Answer 16

• The right to do so is contained in the partnership agreement.
• The consent of all the remaining partners is obtained.

Question 17

What should you consider to determine if a partnership is a suitable business structure for your clients ?

Answer 17

*Dynamic of personal relationship
* Cost and time required for regulatory requirements
* Desire for control
* Working capital required and available
* Need to obtain financing
* Business’ probability of liability
* Tax impact
* Income expectations
* Expectations for business after death or disposition
* Number of employees

Question 18

What is a corporation ?

Answer 18

A corporation is a distinct legal entity, separate from the people who own the business, who are referred to as its
shareholders.

[Property acquired by the corporation does not belong to the shareholders of the corporation, but to
the corporation itself, and the shareholders have no liability for the debts of the corporation.]

Question 19

How and under what circumstances can lead to the termination of a corporation ?

Answer 19

• Death of a shareholder
• Incapacity of a shareholder
• Withdrawal of a shareholder
• Bankruptcy of a shareholder

Question 20

To determine if a corporation is a suitable business structure for your clients, consider the following factors ?

Answer 20

*Dynamic of personal relationship
* Cost and time required for regulatory requirements
* Desire for control
* Working capital required and available
* Need to obtain financing
* Business’ probability of liability
* Tax impact
* Income expectations
* Expectation for growth of the business
* Expectations for business after death or disposition
* Number of employees

Question 21

What are the items that a partnership or shareholder agreement should address ?

Answer 21

*Nature of the business
* Methods of financing the business
* Ownership structure of the business
* Methods for transfer of ownership
* Control and management of the business
* Key roles and responsibilities of parties to the business
* Dispute resolution mechanisms
* Deadlock mechanism
* Mechanisms for death, disability, divorce, insolvency, or departure of a partner
* Business valuation mechanisms

Question 22

What are some tax strategies that are faciliated through corporation shares ?

Answer 22

Income Splitting
Estate Freeze

Question 23

What is income splitting ?

Answer 23

If the spouse and adult children of a shareholder are also shareholders in the corporation, they may be eligible to
receive dividends that will be taxed in their hands. However, dividends received by family members may be subject
to tax on split income.

Family members can be employed by the corporation with salaries paid to them, as long as the amount paid is
reasonable for the work performed.

Question 24

What is an estate freeze ?

Answer 24

An estate freeze is a series of transactions undertaken as part of a financial plan. Using an estate freeze, a client can
transfer ownership of property to another individual.

[Generally, shares are transferred to a holding company or a
family trust. This strategy allows the value of the shares to remain fixed at their current value, at the time of the
estate freeze, but without the shareholder having to relinquish control of the business.]

Question 25

What can an estate freeze allow a client to accomplish ?

Answer 25

**Transfer future appreciation of the shares to others (e.g., children, grandchildren).** * Defer the payment of taxes on capital gains. * **Determine the income tax liability at a specific time, thereby reducing the uncertainty of tax liability in the future.** * Potentially multiply the availability of the capital gains exemption for small business corporation shares (if the exemption is still available at the time of disposition of the shares).

Question 26

What are the events that can trigger a buy-sell agreement to be enacted ?

Answer 26

*Death of a business owner or key person * Disability of a business owner or key person * Departure of a business owner or key person * Dispute between business owners or key persons

Question 27

Who are the parties that may be included in the conditions of the buy sell agreement ?

Answer 27

*Shareholders of a corporation * Partner in a partnership * Key employee * Family of a deceased business owner

Question 28

What are some additional clauses that maybe added to a buy-sell agreement ?

Answer 28

* Eligible individuals who may purchase a partner’s or shareholder’s interest in the business * Triggers that will enact a buyout of a partner’s or shareholder’s interest in the business * The price or mechanism that will be used to value a partner’s or shareholder’s interest in the business

Question 29

What are the two main types of buy-sell agreements ?

Answer 29

* Cross purchase * Redemption (also known as entity purchase) *Hybrid agreement (a cross btw the two types, cross & purchase).

Question 30

What are the impacts of a partner buyout ?

Answer 30

The estate of the deceased The Shareholder The corporation

Question 31

What are the conditions/requirements of an enforceable contract ?

Answer 31

*First, there must be two parties to every contract: the offeror and the acceptor (or offeree). *The offeror makes an offer and the acceptor accepts the offer. *The contract must also have a valid offer that is definite, with enough details to ensure that, if accepted, a court will know exactly what the contract’s terms are. *A contract requires a valid acceptance. The contract is made only after an offer has been accepted by the acceptor and the acceptance has been communicated to the offeror. *The offeror of a contract must seriously intend to create legal relations by demonstrating the intention to create a legal contract.

Question 32

Who might not have the legal "capacity to contract" ?

Answer 32

*Status Indians * Infants or minors * Corporations (in certain situations) * Persons of diminished mental capacity * Enemy aliens * Bankrupt persons

Question 33

When may an offer be terminated, under what circumstances ?

Answer 33

* Revocation by offeror * Lapse * Rejection by the acceptor * Counteroffer by the acceptor * Death or incapacitation of offeror or acceptor

Question 34

When is a contract considered to have never existed ?

Answer 34

When it is voided.

Question 35

Contracts that are considered unlawful, and thus none of their terms can be enforced in a court, include the following types of agreements ?

Answer 35

*Bets and wagers: In many provinces, gaming and wagering contracts are void, and no action or lawsuit may be maintained to recover allegedly won (i.e., owing) funds. If making a bet or wager, clients should be aware that the law will not help them collect if they should win, nor will the court help the other party collect for losses. *Crime: Contracts involving a breach of any criminal statute are illegal and are considered to have never been formed.

Question 36

When a purchaser is required to not engage in a business for a certain length of time what is this agreement called ?

Answer 36

restraint of trade. *Like a non-compete clause. [The courts have held that if the scope of the business is unduly restrictive and the term and geographic limitations are unreasonable, the part of the contract prohibiting the vendor from competing is void. In some cases, contracts that involve a breach of the Competition Act may be deemed illegal.]

Question 37

What mistakes made in the forming of a contract might make the contract void ?

Answer 37

*Both parties are mistaken as to the subject matter of the contract; for example, the goods that are the subject of the contract do not actually exist. * There is a mistaken assumption by both parties of a fundamental aspect of the subject matter of the contract. * Clients who sign a contract thinking they are signing a will cannot have that contract enforced against them.

Question 38

If a property has changed hands under a contract that is subsequently declared void, does the transferor have the right to get it back ? ["Contracts made by mistake"]

Answer 38

Yes, even if the transferee has since sold or transferred the property to a third party. -[if the situation was "Contract made by mistake"]

Question 39

What are several curcumstances when a contract may be rendered voidable ?

Answer 39

*Contracts entered into involving a minor *Contracts entered into under duress * Contracts entered into under undue influence * Contracts entered into containing a misrepresentation

Question 40

If property has changed hands under a contract that a court subsequently declares to be voidable, does the transferor have the right to get it back ? [ "Termination of a contract" ]

Answer 40

The transferor can choose to end the contract and have the property returned, **if it has not yet been transferred to a third party.** [Termination of a contract]

Question 41

What are the various ways a contract can be terminated ?

Answer 41

by agreement, frustration, operation of law, or breach of terms.

Question 42

What is termination by agreement ?

Answer 42

All parties to a contract may agree to cancel or alter the terms of a contract in such a way as to terminate it.

Question 43

What is termination by frustration ?

Answer 43

the occurrence of an unforeseen event that makes performance of a contract difficult, or even impossible, does not affect the contractual obligations of the parties.

Question 44

When does termination by frustration apply, under what circumstances ?

Answer 44

* Performance is made impossible by a change in the law. For example, a person agrees to sell a parcel of land to a non-resident and a retroactive legislation is passed that prohibits non-residents from owning land in that jurisdiction. * The object upon which a contract is based no longer exists. For example, a client agrees to buy a home and, before the possession date, the home is destroyed by fire. * Performance of a personal services contract becomes impossible. For example, subject to express contractual provisions, a professional athlete is injured and cannot perform as agreed.

Question 45

What is termination by operation of law ?

Answer 45

* When a bankrupt client is discharged from bankruptcy, all debts and obligations are terminated and all related contracts become unenforceable, except student loans. **Obligations to repay student loans are only released if the application for bankruptcy is made at least seven years after the person ceased to be a student.** * In some provinces, statutes give the court power to amend contracts considered “harsh and unconscionable.” This legislation often applies to contracts in which interest rates imposed on a debtor are well above standard rates for a similar risk. * Provincial legislation in various areas establishes limitation periods for different types of lawsuits.

Question 46

What is termination by breach of terms ?

Answer 46

When a client breaches (i.e., does not comply with) the terms of a contract, a dispute occurs that may terminate the contract.

Question 47

What ways may a breach of contract occur ?

Answer 47

*A person can make it impossible to comply with the terms of the contract. * A person may clearly state an intention not to comply. At the time the person makes such a statement, the other person in the contract has the option to continue to insist on compliance or to repudiate the contract and treat it as being discharged. * In the most common type of breach, a person simply fails to perform the required actions within the required time.

Question 48

Is a verbal contract binding ?

Answer 48

Yes, it can be but for the purposes of certainty, however, it is preferable to have all terms of a contract in writing.

Question 49

What type of contracts must be evidenced in writing ?

Answer 49

*Land contracts * Guarantee contracts * Executor’s promises * Marriage settlements * Ratification by minor * Sale of goods * Leases