Biz Orgs Blackboard Quiz 1
Newsday Magazine hired Amy, a freelance journalist, to write an article concerning the life of the average Iraqi citizen during the reign of Saddam Hussein. Newsday paid for Amy to travel to Iraq to interview several people for the article. Unfortunately, Amy did not speak Arabic, and her interviewees did not speak English--facts of which Newsday was aware. As a result, Amy hired Uday, an Arabic interpreter, to act as a translator for the interviews. Initially, Uday did not know about Amy's involvement with Newsday. After Uday completed his services, Amy told Uday that her article would be published in Newsday Magazine and that Newsday would pay Uday's fees. Later, Uday submitted a bill to Newsday for his fees. Newsday refused to pay Uday's bill, claiming that Amy had no authority to hire him. Assume that the common law of the United States applies. What is the likely result of an action that Uday brings against Newsday? A. Uday will prevail because Amy had actual implied authority to hire him. B. Uday will prevail because Amy had apparent authority to hire him. C. Newsday will prevail because Amy was only an independent contractor and therefore was not an agent of Newsday. D. Newsday will prevail because Newsday was undisclosed to Uday at the time Amy hired him.
The correct answer is A. Amy had actual implied authority to hire Uday because it was necessary or incidental to accomplishing her task of writing the article. See Section 2.02(a) of the Restatement. Answer B is incorrect because Amy did not have apparent authority to hire Uday; Newsday was an undisclosed principal, so it is impossible to see how Newsday made any "manifestation" that reached Uday and caused him to have a reasonable belief that Amy could hire him. Again, Uday didn't even know about Newsday at the time of the contract. Answer C is incorrect because Amy's status as an independent contractor does not preclude her from binding the principal Newsday for contractual liabilities like it would for tort liabilities. Answer D is incorrect because Newsday's status as an undisclosed principal does not alter Amy's ability to bind Newsday because actual authority only requires that the agent (not the third party) have a reasonable belief that the agent could do something. See Section 2.01 of the Restatement.
Which of the following choices is NOT true about an agency relationship? A. Termination of the agency relationship is effective only if the principal and the agent both consent. B. The agent must be subject to the principal's control. C. The agent has a fiduciary duty to the principal. D. The agent acts on behalf of the principal and not herself.
The correct answer is A. The other three statements are all true statements of the law with respect to agency relationships. See Section 1.01 of the Restatement (Third) of Agency. A is the incorrect statement because no consent of the agent is necessary in order to terminate an agency relationship. For that matter, an agent could quit as well, thereby terminating the agency relationship without the principal's consent being necessary.
Tom is the owner of Tom's Brew House, a sole proprietorship. Tom hires Sandy and tells her that she is to order the ingredients to make Tom's famous beers. While Tom is on vacation, there is a great sale on hops at Hops R Us. Hops are a key ingredient in beer and one of the main items Sandy purchases on a regular basis from Hops R Us. Sandy orders a large quantity of hops from Hops R Us. She also orders some new storage containers from Storage Solutions, a new business that Tom's Brew House has not worked with in the past, to hold the hops. She ordered these containers because Tom did not already have enough storage for the hops. As to the hops, what is the best position regarding whether Tom will have to accept delivery from Hops R Us? A. Sandy had actual express authority to order the hops. B. Sandy had actual implied authority to order the hops. C. Tom is estopped from denying that he has to accept delivery. D. Sandy did not have authority to order the hops and Tom does not have to accept delivery.
The correct answer is A. Tom hired Sandy to order hops, which is what gives her actual express actual authority. Answer B is wrong because having actual express authority means that she does not have actual implied authority for the same transaction. Answer C is wrong because Section 2.05 of the Restatement, which concerns estoppel, requires that there be a "person who has not made a manifestation that an actor has authority as an agent and who is not otherwise liable as a party to a transaction purportedly done by the actor on that person's account." Here, Tom did make a manifestation (to Sandy) that Sandy had authority to order hops, and Tom is liable for this transaction. So Section 2.05 is inapplicable. Answer D is wrong because Sandy did have actual express authority.
A, B, and C are chiropractors who formed a partnership to perform chiropractic services. One day, Partner A negligently injured a patient's back. Partners B and C were on vacation at the time. Which of the following is correct? A. The partnership is liable for the claim, but Partner A has not breached her duty of care to the partnership. B. The partnership is liable for the claim, and Partner A has breached her duty of care to the partnership. C. The partnership is not liable for the claim because Partner A has breached her duty of care to the partnership. D. The partnership is not liable for the claim because Partner A was acting alone.
The correct answer is A. Under RUPA § 305, a partnership is liable for a partner's actions when the partner was "acting in the ordinary course of business of the partnership or with authority of the partnership." Here, A was clearly acting in the ordinary course of business at the time the tort occurred. Under RUPA § 404(c), A's duty of care to the partnership is to refrain from "grossly negligent or reckless conduct, intentional misconduct, or a knowing violation of law." Here, A was "only" negligent, not grossly negligent (or worse). These two rules leave Answer A as the only correct answer.
Four partners formed a partnership. Their partnership agreement contained the following sections, among others: - Section 1: A new partner may be admitted to the partnership if at least 75% of the current partners vote to admit the new partner. - Section 2: Ordinary negligence will be considered to be a breach of a partner's duty of care to the partnership. Which of these sections are valid under RUPA? A. Both sections are valid. B. Both sections are invalid. C. Section 1 is valid, but Section 2 is invalid. D. Section 1 is invalid, but Section 2 is valid.
The correct answer is A. When deciding whether a clause in a partnership agreement is enforceable (that is, valid), you need to decide whether the clause is prohibited by RUPA § 103(b). Here, nothing in RUPA § 103(b) would prevent the partners from adopting Section 1. (Note that, in the absence of this clause, unanimous consent would be necessary to admit a new partner.) Therefore, Section 1 is enforceable. Section 2 is likewise enforceable, because it is increasing the partners' duty of care (note that RUPA § 404(c) states that a partner's duty of care to the partnership and other partners is to refrain from gross negligence and worse) and RUPA § 103(b)(4) only prevents them from unreasonably reducing the duty of care. Thus, both sections are valid, which makes Answer A the correct answer.
Steve, Sue and Joanne form a partnership. They do not have a partnership agreement. For the most recent year, the partnership had a profit of $180,000. Steve and Sue want to distribute $50,000 to each of the partners and retain $30,000 in the partnership for future growth. Joanne wants to distribute $60,000 to each of the partners. What result? A. No distributions are made. B. $50,000 is distributed to each of the partners. C. $60,000 is distributed to each of the partners. D. $50,000 is distributed to each of Steve and Sue, and $60,000 is distributed to Joanne, and their partnership accounts are adjusted to account for the differences in distribution.
The correct answer is B. A distribution is something that needs to be voted on by the partners (unless the partnership agreement addresses the issue already). Under RUPA § 401(h) each partner has one vote, and under RUPA § 401(j) decisions in the ordinary course of partnership business are decided by a majority of the partners, which Steve and Sue comprise. Therefore the other three answers are all wrong since the majority voted to have the partnership pay a $50,000 distribution to each partner.
Ms. Circle, Ms. Triangle, and Mr. Square formed a partnership to manufacture and sell shoes. The three partners each signed a written partnership agreement that included the following provisions: (1) partners shall not be deemed to owe a duty of care to the partnership other than to avoid intentionally killing customers ("Clause 1") and (2) if a partner were to dissociate within five years after the partnership was formed for any reason other than death, the dissociation would be considered wrongful ("Clause 2"). Are these clauses permissible under RUPA § 103? A. Clause 1 is permissible, but Clause 2 is not. B. Clause 2 is permissible, but Clause 1 is not. C. Both clauses are permissible. D. Neither clause is permissible.
The correct answer is B. According to RUPA § 103(b)(4), a partnership agreement may not unreasonably reduce the duty of care, which is what Clause 1 seems to be doing. (RUPA § 404(c) provides that partners have a duty of care to avoid "grossly negligent or reckless conduct, intentional misconduct, or a knowing violation of law.") But there is nothing in RUPA § 103(b) that prohibits Clause 2. In fact, RUPA § 602(b)(1) expressly authorizes partnership agreements to specify types of wrongful dissociations. This makes Answer B the only correct answer.
Allen and Barry operate a business as a partnership. The partnership is currently insolvent, as is Allen individually. Barry has assets in an amount sufficient to pay all of Allen's personal debts as well as the obligations of the partnership. Which of the following statements is correct? A. Barry is jointly and severally liable with Allen for Allen's personal debts. B. Barry is jointly and severally liable with Allen to partnership creditors to the extent that their claims exceed the partnership's assets. C. Partnership creditors cannot recover against Barry's personal assets beyond his profit and loss sharing ratio. D. None of the above is correct.
The correct answer is B. Barry's joint and several liability with Allen is limited to partnership creditors. Therefore, Answer A is incorrect. Answer C is incorrect because RUPA § 307 does permit recovery against Barry's personal assets. Answer D is wrong because Answer B was correct.
Same facts as the previous question. As to the new storage containers, what is the best position regarding whether Tom will have to accept delivery from Storage Solutions? A. Sandy had actual express authority to order the storage containers. B. Sandy had actual implied authority to order the storage containers. C. Sandy had apparent authority to order the storage containers. D. Sandy did not have authority to order the storage containers and Tom does not have to accept delivery.
The correct answer is B. Sandy had actual implied authority because buying the storage containers was necessary element of her exercising her express actual authority to buy the hops. After all, the hops need to be stored somewhere, don't they? Answer A is wrong because she had actual express authority to buy hops, not the storage containers. Answer C is wrong because she did not have apparent authority to order the storage containers because Storage Solutions did not know her and Tom made no manifestation to them about her authority. Answer D is wrong because Sandy did have actual implied authority.
Art and Bart are the two partners of Art-Bart, a partnership. Sam and Pam are the two shareholders of Sam-Pam Corp., and also work as employees there. One day, an employee of Art-Bart committed a negligent act, injuring a third party ("Tort 1"). On that same day, Pam was driving a car owned by Sam-Pam Corp. on company business and negligently injured a pedestrian ("Tort 2"). Assuming no other facts, which of the following statements concerning liability is correct? A. Art and Bart are both personally liable for Tort 1, and Sam and Pam are both personally liable for Tort 2. B. Art and Bart are both personally liable for Tort 1, and Pam is personally liable for Tort 2. Sam is not personally liable for Tort 2. C. Neither Art nor Bart is personally liable for Tort 1, but Sam and Pam are both personally liable for Tort 2. D. Neither Art nor Bart is personally liable for Tort 1. Neither Sam nor Pam are personally liable for Tort 2.
The correct answer is B. The Art-Bart partnership is liable for the acts of its employee (Tort 1), and Sam-Pam Corp. is liable for the acts of its employee (Tort 2), under respondeat superior. But what about the owners? In a partnership, partners are personally liable for partnership debts. This means that Art and Bart are both personally liable for Tort 1. In a corporation, the general rule is that shareholders are not personally liable for corporate debts. This means that neither Sam nor Pam is liable for Tort 2 simply as a result of being a shareholder. However, one is always responsible for one's own actions. This means that Pam is liable for her own actions (Tort 2). This makes Answer B the only correct answer.
Cheryl and Sue form a partnership to run a deli. Later, Cheryl sells her partnership interest to Dave. Which of the following is true? A. Cheryl may not sell any part of her partnership interest unless Sue consents. B. Cheryl is still a partner, but Dave now has the right to share in the profits and losses of the partnership and to receive distributions in place of Cheryl. C. Dave is now a partner, but he cannot vote on any partnership matters. D. Cheryl's attempted sale of her partnership interest is an act of dissociation and it causes the partnership to dissolve.
The correct answer is B. Under RUPA §§ 502 and 503 Cheryl can transfer the financial aspects (i.e., her "transferable interest") of her interest in the partnership to a third party, but she cannot transfer all of her rights as a partner. Nothing in RUPA §§ 502 or 503 would require Sue's consent. Therefore, Answer A is wrong. Similarly, Answer C is wrong because Cheryl cannot sell her right to be a partner. Upon the sale, Dave was merely a transferee of Cheryl's transferable interest, but he did not become a partner. Answer D is also wrong because such a sale is not an act of dissociation under RUPA § 601 or an event of dissolution under RUPA § 801. Cheryl is still a partner. See also RUPA § 503(a)(2).
Sue owns Sue's Hardware Store, a sole proprietorship. In January, Sue hired Frank to work as the manager of the store and told him that he could order up to $3,000 of tools each month for the store. From January through July, Frank ordered $3,000 worth of tools from Craftsman Tools. Each month, Craftsman Tools sent the bill to Sue, and Sue promptly paid each bill. In August, Sue told Frank that he could no longer order tools for the store. Notwithstanding these instructions, Frank ordered $3,000 in tools from Craftsman Tools in September. Craftsman Tools delivered the tools and billed Sue. Sue refused to pay the bill. Craftsman Tools sued Sue. What is the likely result of this lawsuit? A. Sue will not have to pay for the tools because Frank's authority to order the tools was rescinded before he ordered the tools in September. B. Frank will have to pay Craftsman Tools for the tools because he exceeded his authority when he ordered the tools in September. C. Sue will have to pay for the tools because Frank had apparent authority to order the tools in September. D. Sue will have to pay for the tools because Frank had actual implied authority to order the tools in September.
The correct answer is C. Frank had apparent authority since he had been ordering $3,000 for a number of months and Sue had been paying the bills, which should be a sufficient "manifestation" to Craftsman to create apparent authority. Absent some notice from Sue to Craftsman communicating her withdrawal of Frank's authority, Craftsman was reasonable in believing that, in September, Frank had authority to make the order. Answer A is wrong because Sue's statement to Frank only terminated his actual authority, not his apparent authority. Answer B is wrong because, while Frank did exceed his actual authority, he still had apparent authority, so Sue is liable to Craftsman. However, Frank is not liable to Craftsman because he was acting on behalf of a disclosed principal. Read Section 6.01 of the Restatement carefully. (Of course, Frank will be liable to Sue for damages resulting from disobeying her instructions.) Answer D is wrong because Frank did not have actual implied authority to order the tools--all of his actual authority (both express and implied) was terminated when Sue told Frank that he could no longer order tools for the store.
Madonna, Sylvester Stallone, Hayden Christiansen, and Keanu Reaves formed a partnership to run an acting school. Their partnership agreement had no provision with respect to withdrawal or dissociation of a partner, but it did provide that the partnership was to have a 10-year term. Much to everyone's surprise, the acting school business was not as profitable as expected. After one year, Madonna withdrew from the partnership. The remaining partners continued running the partnership business. Madonna then made a written demand to the partnership to be paid for the value of her interest. What is the proper result under RUPA? A. Madonna is entitled to cash equal to the fair value of her partnership interest, less any damages caused by her dissociation. The partnership must pay the buyout amount to Madonna within 120 days. B. Madonna is entitled to cash equal to that amount she would get if the partnership were liquidated and its assets were sold at a price equal to the greater of liquidation value or the value based on a sale of the entire business as a going concern without Madonna as a partner. The buyout amount is reduced by any damages caused by Madonna's dissociation. The partnership must pay the buyout amount to Madonna within 120 days. C. Madonna is entitled to cash equal to that amount she would get if the partnership were liquidated and its assets were sold at a price equal to the greater of liquidation value or the value based on a sale of the entire business as a going concern without Madonna as a partner. The buyout amount is reduced by any damages caused by Madonna's dissociation. The partnership is not obligated to pay the buyout amount to Madonna until the end of the 10-year term, unless Madonna can show that earlier payment would not cause undue hardship to the partnership. D. Madonna is not entitled to anything, because her dissociation from the partnership was wrongful.
The correct answer is C. This is the proper statement of the law regarding a dissociation of a partner of a partnership for term before the end of the term. See RUPA §§ 701(b) and (h). Answer A is incorrect because it has the wrong statement of the formula for Madonna's "buyout" and the timing of that buyout is also incorrect. Answer B is incorrect because it has the incorrect timing for the buyout. Answer D is incorrect because while Madonna's dissociation is wrongful, that does not preclude her from receiving a buyout.
Melissa hires Todd to work at the restaurant she owns, which is called the New York Pasta Depot, and often called the "NYPD" for short. One day, Melissa sends Todd out to get some new pots and pans. Melissa hasn't bought any pots or pans in years, so she tells Todd to go out and find a store that will sell the NYPD some pots and pans on credit. Todd goes to the "Pasta & More" store. He tells a salesman that he works for "the NYPD" and that the NYPD needs some new pots and pans. The store salesman, however, convinces Todd to buy two brand-new pasta machines instead. The machines cost $1,000 each. Todd brings back the pasta machines and Melissa decides to use them. When the bill comes from Pasta & More, does NYPD have to pay? A. Yes, because Todd had actual authority to buy the pasta machines. B. Yes, because Todd had apparent authority to buy the pasta machines. C. Yes, because the NYPD ratified Todd's purchase of the pasta machines. D. No. Instead, Todd must pay for the pasta machines.
The correct answer is C. Todd did not have actual authority because Melissa only authorized him to buy pots and pans. Therefore, Answer A is wrong. Answer B is wrong because nothing in the facts indicates that Melissa made a manifestation that caused Pasta & More to have a reasonable belief that Todd could buy the machines. (After all, he said that he was buying them for the "NYPD," which sounds like the New York Police Department, not a restaurant. In addition, it may not have been reasonable for Pasta & More to believe that an employee could agree to such a large sale.) However, Melissa's decision to use the machines should be sufficient to find that she has ratified the purchase. If you ratify a contract or other transaction, you are agreeing to become bound on that contract or transaction. Answer D is wrong because the purchase was ratified, thereby obligating the NYPD to buy the machines.
Frank and Stacy are partners. Their partnership agreement provides that "No partner shall be personally liable for the debts or obligations of the partnership." The partnership borrowed money from Cooley Bank. Frank signed the loan agreement on behalf of the partnership. The partnership later defaulted on its payment obligations. Upon obtaining the necessary judgment(s), which of the following best describes how Cooley Bank may proceed? A. Cooley Bank may only collect from the partnership because the partnership agreement provides that Frank and Stacy do not have to pay. B. Cooley Bank has the choice of collecting from (1) Frank since he signed the loan agreement and/or (2) the partnership. C. Cooley Bank has the choice of collecting from (1) Frank and/or (2) Stacy, provided that the partnership assets have been used up (i.e., "exhausted"). D. Cooley Bank has the choice of collecting from (1) Frank and/or (2) Stacy and/or (3) the partnership.
The correct answer is C. Under RUPA § 307, a partnership creditor such as Cooley Bank may not collect from the assets of a partner unless it (1) has a judgment against that partner and (2) can satisfy any one or more of the five conditions set forth in RUPA § 307(d). Here, the facts say that the Cooley Bank obtained the "necessary judgment(s)," so we can assume it has a judgment against each of the partnership, Frank and Stacy. (It would have had to have named a person as a defendant in the lawsuit to get a judgment against that person. See RUPA § 307(c).) Answer A is wrong because under RUPA § 103(b)(10) partners may not limit the rights of third parties in the partnership agreement such as the right to hold partners liable for partnership debts. Answer B is wrong because Frank signed the loan on behalf of the partnership, not in his own name. In this fact pattern there is only one reason that Frank is liable for the loan--the fact that he is a partner. Thus, RUPA § 307(d)(5) would not "work" for Cooley Bank and allow it to immediately recover its claim from Frank's assets. Answer D is wrong because Cooley Bank would only be able to collect from Frank and or Stacy once the partnership assets have been exhausted. See RUPA § 307(d)(1). Again, before a judgment creditor of a partner can collect from a partner's assets, the creditor must satisfy one of the five conditions set forth in RUPA § 307(d). The only one that works here is the "exhaustion rule" of RUPA § 307(d)(5).
On January 2, 2012, a business borrowed $1 million from a bank and used the money to buy a machine, which had an expected useful life of ten years. The loan is payable over a five-year period. On December 31, 2012, the business still owned the machine and still owed part of the loan to the bank. Which of the business's financial statements will reflect these transactions? A. The balance sheet for the year ended December 31, 2012. B. The income statement for the year ended December 31, 2012. C. The cash flows statement for the year ended December 31, 2012. D. All of the above.
The correct answer is D. All three of these financial statements will reflect these transactions. The December 31 balance sheet will reflect the machine as one of the business's assets, as well as the amount owing to the bank as one of the business's liabilities. Although the full purchase price of the machine will not show up as an expense on the business's income statement for the year ended December 31, 2012, the purchase of the machine will be depreciated over its useful life. This means that if the business uses "straight line" depreciation, $100,000 will appear as depreciation expense on the income statement. Finally, the cash flows statement will (among other things) "add back" the $100,000 of depreciation expense (since the business did not actually pay anyone that $100,000) to the business's net income figure from the income statement.
Hank Snider was the owner of Hank's Groceries, a sole proprietorship that operated a grocery store. Hank hired Steve Smith as an employee to purchase produce (lettuce, carrots, radishes, etc.) for the store. While Hank is on vacation in January, Steve calls up Dell Computer and buys a 104-inch plasma TV by opening up a new credit account in Hank's name. Steve has the new TV placed in the employee break room so that everyone can watch the Super Bowl. When Hank returns from vacation, he is given the bill from Dell Computer. Which of the following is true? A. Steve had apparent authority. Frank is liable under the contract to Dell. B. Steve lacked authority. Dell may collect under the contract from either Hank or Steve. C. Steve lacked authority. Steve is liable under the contract to Dell. D. Steve lacked authority. Steve is liable to Dell for any damages that Dell can prove.
The correct answer is D. Steve lacked authority. Steve had no actual authority because he only had actual authority to purchase produce. Steve had no apparent authority because Hank made no "manifestation" that would give Dell a reasonable belief that Steve had authority for this purchase (particularly something not in the ordinary course of business for a grocery store). So, this eliminates Answer A. This also eliminates Answer B since there is no way to hold Hank liable. Answers C and D are close, but Answer C mentions liability on the contract, which implies that Steve had authority to enter into the contract on Hank's behalf, which is not true because he lacked authority. Rather, this is a case of an agent's implied warranty of authority (see Section 6.10 of the Restatement) which indicates that a person (like Steve) who purports to act on behalf of another person (like Hank) makes an implied warranty of authority that he has the authority to bind Hank. Therefore, Steve is liable to Dell for its expectation damages from the contract (likely lost profits), but is technically not liable on the contract itself.
Cheryl, Dana and Steve form a partnership to build and manage a shopping center. Their partnership agreement does not say anything about dissociation. After the start of construction but before the shopping center is finished, Cheryl tells Dana that she (Cheryl) is quitting the partnership. Which of the following is correct? A. Cheryl is not allowed to quit the partnership because it is a partnership for a term. B. Cheryl may quit the partnership, but her dissociation will be considered wrongful so she will have to pay whatever damages the partnership has because of the dissociation. C. Cheryl may quit the partnership, but the partnership will continue and she will not be paid her share of the partnership's value until the partnership terminates. D. Cheryl may quit the partnership and her dissociation will cause the partnership to dissolve.
The correct answer is D. This is a partnership at will because it was formed to "build and manage" a shopping mall, which is not a task that could ever really be completed. Therefore, Cheryl's dissociation by express will under RUPA § 601(1) will cause the partnership to dissolve pursuant to RUPA § 801(1). Answer A is wrong because this is not a partnership for a term or undertaking, as explained above. Also, one can always quit a partnership (it's just that doing so is wrongful in some circumstances). Similarly, Answers B and C are incorrect because they state rules applicable to a partnership for a term. (If it had been a partnership for a term or undertaking, then Cheryl's dissociation would have been wrongful under RUPA § 602(b)(2)(i) and she likely wouldn't get paid the value of her interest until the end of the term or the completion of the undertaking pursuant to RUPA § 701(h).)
Cartman, Marsh, Broflovski, and Garrison formed the South Park Partnership to own and operate a ski resort in Colorado. The ski resort was extremely successful. While driving home on a personal errand, Garrison recklessly caused a car accident killing McCormick. McCormick's Estate (the "Estate") filed suit against Garrison and obtained a judgment for $5 million. To date, $4 million of the judgment has not been paid. The Estate brought an action to collect the remainder of the unpaid judgment. In particular, the Estate sought to seize ownership of Garrison's partnership interest in the South Park Partnership, which is valued at $3 million. Which of the following statements is most likely correct? A. The Estate may seize Garrison's partnership interest and demand the partnership's dissolution, unless Cartman, Marsh, or Broflovski agree to purchase the partnership interest at its $3 million fair market value. B. The Estate may seize Garrison's partnership interest and demand the partnership assets be sold and converted to cash to satisfy the judgment. C. The Estate may seize partnership assets to satisfy the judgment. D. The Estate is entitled to a charging order, which would allow the Estate to receive Garrison's share of partnership distributions as long as the judgment remains unsatisfied. However, Garrison will remain a partner of the South Park Partnership.
The correct answer is D. This is the correct statement of the law regarding a charging order under RUPA § 504(d), which is proper for this liability since it is a personal liability of Garrison and not a partnership liability because it happened on Garrison's personal time and had nothing to do with the partnership's business. Therefore, Answers A and B are incorrect because they involve seizing Garrison's partnership interest beyond the financial interest that can be subject to a charging order. Only Garrison's transferable interest in the partnership is subject to a charging order, not his entire partnership interest. Answer C is incorrect because, as stated above, the partnership is not liable for Garrison's actions in this fact pattern. Therefore, the partnership's assets (as opposed to Garrison's assets) are "off limits" to the Estate.
Your client is a recent immigrant from France. He wants to start a small business that will operate a restaurant. He plans to invest most of the "seed money" himself, but doesn't have enough money to get the business up and running on his own. Thus, several of his relatives, including some who still live in France, would also like invest in the business, although they do not plan to be involved in any decision-making. Which of the following would be good advice for your client? A. He should be a sole proprietor. B. He should form a partnership with his relatives. C. He should form a "C" corporation with his relatives. D. He should form an "S" corporation with his relatives. E. He should form a limited liability company (LLC) with his relatives.
The correct answer is E. Forming an LLC is probably the best advice here, because it would accomplish the goals of getting limited liability for the owners (the members in an LLC) and would also be a "flow-through" tax entity. Being a sole proprietor is obviously a bad idea because your client doesn't have enough money to get the business up and running on his own and needs other owner-investors; that is not possible in a sole proprietorship, which must have only one owner. Also, sole proprietors are personally liable for the debts of the business. Forming a partnership would not be a good idea because the partners would be personally liable for the partnership's debts. Forming a "C" corporation with his relatives would probably not be a good idea because (although corporations do shield shareholders from personal liability) "C" corporations are not "flow-though" tax entities. Instead, C corporations pay taxes on their income and shareholders pay taxes on any dividends that they receive from the corporation. Finally, although an "S" corporation accomplishes both goals of getting limited liability for the owners (the shareholders) and would also be a "flow-through" tax entity, as discussed in Chapter 1, an "S" corporation may not have foreign shareholders, such as some of your client's relatives who live in France. LLCs are not subject to these limitations.