200909 Enterprise Law Tutorial 5 (week commencing 20 March): Starting and Running a Business: Business Structures II Problem questions Please prepare answers before attending the class. An * indicates that an answer will be provided on vUWS in due course, as it was released in previous semesters. No answers will be provided for the other questions. 1. *Jemima and Ali have been running a business together called IC2U since July 2016. It sells ice-creams at markets and other events, mostly on the weekends. Jemima owns the van they use and Ali pays for the stock. They share the profits from IC2U 60/40, with Jemima taking 60% because she owns the van and has agreed to do the accounts for the business. They have never put their arrangement into writing because they've decided they don't want to have any legal connections between them. In early November 2016, Jemima disappeared, taking the van with her, and leaving the stock of ice-cream behind in her garage. Ali soon discovers that Jemima had run up a lot of debts. Jemima's debts are as follows: $1750 for repairs to the van after Jemima damaged it when she took it on a holiday in May 2016, prior to starting IC2U with Ali. Ali had asked about the van when they started out, but Jemima said 'there's nothing owing on it anymore - I own it outright so we can use it for the business, no problems'. $850 for a vehicle 'wrap' (a decorative plastic sheeting that is applied to vehicles to carry advertising) that had been placed on the van, showing the IC2U logo and various slogans for the business. $2400 for IC2U's logo design and a large stock of flyers and other marketing material that had been printed for the business. Ali also finds an account book in Jemima's garage that shows Jemima was keeping more of the profits from the business than they had agreed to - it is more like 80%. a) Legally, what type of business relationship are Ali and Jemima in? Consider the Enterprise Law Tutorial Questions, Autumn semester 2017 1 200909 - Enterprise Law Tutorial Questions / Autumn 2016 various types of business structure (as discussed in this Module) and determine whether any of them apply to IC2U. b) Does Ali have to pay any or all of the debts Jemima has left behind? If so, which ones does he have to pay and why? c) If Jemima and Ali had formed a corporation through which to own and run IC2U, how would your answer about these debts vary? d) What share of the profits from IC2U was Ali entitled to and why? e) IC2U was starting to get rather popular before Jemima left, and with Summer here, Ali is considering whether he should continue with the business. He wonders whether he should try to continue by himself, perhaps with a rented van, or whether he should join in with another friend, Jo, who has a suitable van and is looking for weekend work. What advice would you give to Ali about suitable business structures he could adopt if he does decide to keep IC2U going? Of those we have looked at which one do you think would be the best for him? 2. Madge is an actor who wishes to turn her talents towards producing and directing works of drama. She has an amount of $8,500 which she wishes to contribute towards the setting up of her own theatrical group in order to fulfil her ambition. She does not know any wealthy persons who would be prepared to risk the $60,000 minimum capital which she estimates is necessary for the purposes of leasing suitable premises, providing equipment, etc. She does have a group of about 25 theatrical acquaintances who would be interested in forming an experimental theatre group, and who would be prepared to risk an amount between $1,000 and $5,000, depending on individual circumstances. Madge knows very little about matters of business but she does know she would like her group to operate along democratic lines while she retains the 'upper hand'. Discuss the advantages and disadvantages and problems you foresee for Madge and for the other members should Madge's group operate as a partnership, looking particularly at: a. How would the group operate? b. The liability of individual investors for 'group' debts, and 'group' contracts and 'group' torts. c. The liability of Madge. d. Whether the group can hold property. Should the group decide to operate as a company what type of company would best suit their purposes, and why? 3. Anne, Betty, Cathy, Doris, Emily, Fay, Gillian, Helen, Ingrid and June were partners in a firm of accountants called 'The Alphabet Sums'. All ten partners agreed that Ingrid should be appointed managing partner for a three year period. It was also unanimously agreed that Ingrid would only have authority to enter into contracts of up to $50,000 and that any contract beyond that would need to be approved by a majority of a meeting of all partners. 2 200909 - Enterprise Law Tutorial Questions / Autumn 2016 (a) Ingrid entered into a contract in the name of the partnership to lease new premises. The rent was $200,000 per year for a five year term. The economy deteriorated and the rental business market collapsed. The other nine partners refuse to move into the new premises and to start paying on the grounds that the lease agreement was unauthorised. Advise the nine partners. (b) Ingrid also enters into a contract for $40,000 with City Centre Office Supplies Ltd for the purchase of new computers. The other nine partners later discover that Ingrid owns 1% of the issued share capital of City Centre Office Supplies Ltd. Ingrid also received from the company a 2% commission on the contract. Advise the nine partners. 4. What might be some of the pitfalls of being a company director? 3