Question

Question 101 pts

Mike, Dennis, Larry, and Pete are brothers and sole shareholders in the Our Gang Corporation, a close corporation. They are all officers and directors, and share in the day-to-day management of the company. Under which of the following scenarios might the brothers be personally liable for the debts of the corporation?

Group of answer choices

If they fail to hold an annual shareholder meeting

If Dennis, the CFO, deposits accounts receivables in his personal bank account

If they hire their children to work in the company

A and B only

A, B and C

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Question 111 pts

Duff is a school teacher who bakes cakes in the summers and sells them to his friends. Last year, his colleague Martha, also off for the summer, began to help out. She concocted a popular cake using lemons she bought from her neighbor’s orchard, and brought in new customers from her neighborhood. Duff agreed to pay Martha half of the profits from the business. Which best describes the business organization?

Group of answer choices

A sole proprietorship, where Duff is the owner and Martha is an employee

An express partnership, where Duff and Martha have entered into an agreement to be co-owners of a business

A partnership by estoppel, where Duff is estopped from claiming that Martha is not his partner because Martha relied on Duff’s actions in treating her like a partner

An implied partnership, based on the fact that Duff and Martha shared the profits of the business, Martha incurred debts on behalf of the organization, and Martha participated in decision-making

A limited liability company, because Duff and Martha want to avoid paying damages if someone contracts food poisoning from eating a cake

Answer 1

1. The brothers will be personally liable for the debts of the corporation?

Answer - A & B only as a firm is liable to hold an annual general meeting and disclose its financial position. Also the CFO depositing money in his personal account is not ethical. Option C is also not ethical but cannot be a reason for distress in the company.

2. Answer - An express partnership, where Duff and Martha have entered into an agreement to be co-owners of a business.

Sole proprietorship - As Martha has also got in her own set of customers and has shared some profits, it cannot be a sole proprietorship anymore.

A partnership by estoppel - As Martha got in her own customers and it was her recipe that got popular, she did not rely on Duff to treat her like a partner. They mutually agreed to share the profits.

An implied partnership - There is no explicit information on debts incurred by Martha and any other decisions taken by her.

A limited liability company - A limited liability company (LLC) is a structure whereby the owners are not personally liable for the company's debts or liabilities. This does not mean that Duff and Martha are not responsible for the cakes. They are responsible for the quality and ethics dictate they should be able to serve the best quality.