Background Information

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. Charles, Bob and Jane decide to buy out Mary for $25,000. Charles and Jane are each contributing $10,000 to the buyout and Bob is contributing $5,000. 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 another $500,000 in capital, it has the potential of generating substantial profits because of the improving real estate market. Before proceeding, however, their accountant has recommended that they form a corporation and sell the partnership assets now worth $200,000 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 decisionmaking 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.

Assignment Question: (2 marks each)

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

2. Why would issuing Common Shares to each partner be the best way to distribute ownership upon incorporation?

3. 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. Did Bob act properly? (Explain your answer) 4. Disappointed by Bobs conduct, Jane and Charles have decided that they want Bob out of the business. What legal right does Bob have if Jane and Charles gang up on him? (Explain your answer) 5. What should Jane, Charles and Bob have done when they formed the corporation to avoid the problems they are experiencing? (Explain your answer) (2 marks)