1.Two people start a business together. One contributes only money and does not take part in running the business, while the other manages operations with unlimited liability. This arrangement is best described as a:
- A.Sole proprietorship
- B.General partnership
- C.Limited partnership
- D.Public corporation
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Correct answer: C. Limited partnership
In a limited partnership, the general partner runs the business with unlimited liability, while the limited partner only contributes money and is liable only for the amount contributed, provided they do not actively manage the business.
2.A key advantage of incorporating a business (forming a corporation) compared with a sole proprietorship is that:
- A.It is the cheapest and simplest structure to set up
- B.The corporation is a separate legal entity, so shareholders' personal assets are generally shielded from corporate liabilities
- C.It eliminates the need to keep any separate financial records
- D.It exempts the business from all taxation
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Correct answer: B. The corporation is a separate legal entity, so shareholders' personal assets are generally shielded from corporate liabilities
A corporation is a separate legal entity (a legal 'person'), so liability is generally limited to the corporation and shareholders' personal assets are protected. Sole proprietorships are cheaper to set up, but a corporation requires separate accounts and records.
3.A director of a corporation owes a fiduciary duty, which requires the director to:
- A.Maximize their own personal financial return from board decisions
- B.Act honestly, in good faith, and in the best interests of the corporation
- C.Vote on every contract regardless of personal interest
- D.Report only to the company's largest shareholder
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Correct answer: B. Act honestly, in good faith, and in the best interests of the corporation
A director's fiduciary duty is the obligation to behave honestly, in good faith, and in the best interests of the corporation, placing the corporation's interests above the director's own.
4.A corporate director discovers that a transaction the board is about to vote on involves a company in which the director personally holds shares. The most appropriate action is to:
- A.Mention the ownership and then vote anyway
- B.Vote in favour because the contract is small
- C.Declare the conflict of interest and abstain from voting
- D.Resign from the board immediately
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Correct answer: C. Declare the conflict of interest and abstain from voting
A director must disclose any personal interest in a material contract or transaction the corporation is involved in, and must not vote on it. The correct action is to declare the conflict of interest and not vote.
5.What is the principal defence available to corporate directors and officers facing liability under statutes governing matters such as unpaid wages, taxes, or environmental breaches?
- A.Insider knowledge of the breach
- B.Due diligence, having taken all reasonable steps to ensure no breaches occurred
- C.Limited liability of the corporation
- D.A waiver of subrogation
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Correct answer: B. Due diligence, having taken all reasonable steps to ensure no breaches occurred
Several statutes impose obligations on directors and officers (wages, environment, taxes). The principal defence is due diligence: showing that all reasonable, active steps were taken to ensure no breaches occurred. Note that liability insurance does not protect against jail time.
6.Buying or selling shares of a corporation on the basis of important non-public information is:
- A.Permitted if the trade is small in value
- B.Insider trading, which is illegal
- C.A normal exercise of a director's fiduciary duty
- D.Allowed for directors but not officers
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Correct answer: B. Insider trading, which is illegal
Insider trading is the purchase or sale of shares based on non-public information, and it is illegal. Securities commissions exist in part to prohibit it and to promote fair and efficient trading.
7.A director's fiduciary duty requires them to:
- A.Maximize their personal profit
- B.Act honestly, in good faith, and in the best interests of the corporation
- C.Follow all instructions from shareholders
- D.Avoid making any business decisions
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Correct answer: B. Act honestly, in good faith, and in the best interests of the corporation
The fiduciary duty is the obligation to behave honestly, in good faith, and in the best interests of the corporation.
8.A director with a conflict of interest must:
- A.Vote in favor of the company
- B.Disclose their interest and abstain from voting
- C.Resign immediately
- D.Ignore the conflict
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Correct answer: B. Disclose their interest and abstain from voting
Directors must disclose personal interest in material contracts and must not vote in such matters.
9.The main advantage of a corporation over a sole proprietorship is:
- A.Lower tax rates in all situations
- B.Limited liability protection for shareholders
- C.Simpler regulatory requirements
- D.Guaranteed profitability
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Correct answer: B. Limited liability protection for shareholders
The primary advantage of a corporation is limited liability: shareholders are generally not personally liable for the corporation's debts, unlike sole proprietors who have unlimited personal liability.
10."Piercing the corporate veil" means:
- A.Dissolving the corporation voluntarily
- B.Holding shareholders personally liable for corporate obligations
- C.Transferring corporate assets to new owners
- D.Changing the corporation's articles of incorporation
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Correct answer: B. Holding shareholders personally liable for corporate obligations
Courts may "pierce the corporate veil" and hold shareholders personally liable when the corporation is used as a sham, for fraud, or to circumvent legal obligations.
11.A "limited liability partnership" (LLP) provides:
- A.Unlimited liability for all partners
- B.Limited liability for partners regarding the negligence of other partners
- C.No liability for any partner
- D.The same liability protection as a corporation for all debts
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Correct answer: B. Limited liability for partners regarding the negligence of other partners
In an LLP, partners have limited liability for the negligence of other partners. However, each partner remains fully liable for their own professional negligence.
12.A professional corporation providing engineering services:
- A.Eliminates the engineer's personal liability for professional negligence
- B.Requires the professional to remain personally liable for professional negligence
- C.Does not need a Permit to Practice
- D.Cannot employ other engineers
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Correct answer: B. Requires the professional to remain personally liable for professional negligence
In a professional corporation, the engineer remains personally liable for professional negligence. The corporation only provides limited liability protection for business debts.
13.The "business judgment rule" protects directors when:
- A.They make decisions that result in profits
- B.Their decisions were made honestly, in good faith, and on a reasonably informed basis
- C.They follow the majority shareholder's instructions
- D.They avoid making any risky decisions
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Correct answer: B. Their decisions were made honestly, in good faith, and on a reasonably informed basis
The business judgment rule protects directors from liability for business decisions provided they were made honestly, in good faith, and on a reasonably informed basis, even if the outcome is unfavourable.
14.A "designated responsible member" for an engineering firm:
- A.Handles the firm's finances
- B.Takes responsibility for ensuring the firm's engineering work meets professional standards
- C.Is always the firm's CEO
- D.Is appointed by the provincial government
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Correct answer: B. Takes responsibility for ensuring the firm's engineering work meets professional standards
The designated responsible member is a licensed P.Eng who takes responsibility for ensuring the firm's engineering work meets professional standards and regulatory requirements.
15.Directors can be held personally liable for:
- A.All business debts of the corporation
- B.Unpaid employee wages, unremitted taxes, and environmental violations
- C.Decisions made before they became directors
- D.Declines in share price
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Correct answer: B. Unpaid employee wages, unremitted taxes, and environmental violations
Directors have personal liability exposure for specific statutory obligations including unpaid employee wages, unremitted source deductions, environmental damage, and health and safety violations.
16.A "joint venture" differs from a partnership in that:
- A.A joint venture has more partners
- B.A joint venture is usually limited in scope and duration to a specific project
- C.A partnership is always temporary
- D.A joint venture always involves a corporation
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Correct answer: B. A joint venture is usually limited in scope and duration to a specific project
A joint venture is a temporary business arrangement for a specific project or purpose. Unlike a general partnership, it is limited in scope and duration.
17.In a "general partnership," each partner:
- A.Has liability limited to their investment
- B.Has unlimited personal liability for partnership debts
- C.Cannot make decisions without unanimous consent
- D.Must be a licensed professional
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Correct answer: B. Has unlimited personal liability for partnership debts
In a general partnership, each partner has unlimited personal liability for the debts and obligations of the partnership and can bind the partnership in contracts.
18.An engineering firm's Permit to Practice (CofA) can be revoked if:
- A.The firm fails to win enough contracts
- B.The designated responsible member leaves and is not replaced
- C.The firm changes its office location
- D.A single project goes over budget
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Correct answer: B. The designated responsible member leaves and is not replaced
A Permit to Practice may be revoked if the firm fails to maintain the requirements, including having a designated responsible member. The firm must replace the departing P.Eng to maintain its permit.
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