BUS 207 - Final Review
Jill is a limited partner in the Aanama Limited Partnership. Jill invested $5,000 to buy her interest. Jill is one of ten (10) partners, two (2) of whom are general partners. Aanama has gone bankrupt, with debts exceeding assets by $96,000. The partnership creditors sue all the partners for these debts. Based on these facts, the most that Jill must now contribute is
$0.
. Edith, Archie, and Gloria were partners in EAG Partnership, which has been dissolved. When EAG was formed, Edith contributed capital of $90,000, Archie contributed capital of $45,000 and Gloria contributed capital of $15,000. The three partners agreed to share profits and losses in this manner: 50 percent to Edith; 30 percent to Archie; and 20 percent to Gloria. Following liquidation of all partnership assets and distribution of the proceeds to creditors, there remains $36,000 due and owing to outside partnership creditors. Among Edith, Archie, and Gloria, which amount represents Edith's proper share of the amount still owed to creditors?
$3,000 [Among the three partners, Edith's proper share of the amount still owed to creditors is $3,000. The total partnership loss here is $186,000 ($150,000 in contributed capital plus $36,000 in debt remaining after liquidation assets). Edith's share of the loss is $93,000 (50 percent of $186,000), because here the partners agreed that split of profits and losses. Because Edith has already lost her $90,000 capital contribution, she must contribute only another $3,000. Do realize, however, that if creditors compel her to pay/chase her for more than the $3,000 (which they can do - they can elect to chase her for the full $36,000 from, for example, her personal/non-partnership assets), she will then have a claim against Archie and Gloria for any amounts she pays in excess of $3,000; whether she can/will be able to collect it from them is another manner, but she at least has that legal claim for reimbursement she could assert against the them (it's called "indemnification" -- which is a legal word for reimbursement). See also Multiple Choice Question No. 24 below, and, Short Answer Question No. 8 below.]
Mary was a limited partner in a limited partnership that had four (4) total limited partners and one (1) general partner. Mary and one other limited partner invested $40,000 each in the partnership, the other two limited partners invested $60,000 each and the general partner invested $800,000. Their written limited partnership agreement made no mention as to the sharing of profits and losses. In the first year of operations the partnership had net income of $100,000. How much should be allocated to Mary?
$4,000. [Remember that in the absence of an agreement to the contrary, partners in a limited partnership share profits/losses based upon their capital contribution, not according to the number of partners - i.e., the rule for limited partnerships is not the same as for ordinary partnerships.]
Cowlings, Kaelin, and Simpson formed a partnership. They made no express agreement concerning how profits were to be divided. Of the $100,000 initial capital of the firm, Cowlings and Simpson each contributed $40,000. Kaelin contributed $20,000. The partnership had a profit of $150,000 during the first year the partnership business was in operation. What is Kaelin's share of the profit?
$50,000 You will see that in a general/ordinary partnership, in the absence of an agreement to the contrary on the issue, partners share profits equally/based on the number of partners, not in accordance to the percentage of their capital contributions.
A partnership has $100,000 in assets. Outside creditors are owed $70,000, Partners are owed $60,000 on their loans to the partnership, partners have capital balances of $80,000, and profits in the current year are $90,000. At this point how much are the partners entitled to receive for their capital balances?
$60,000 Under these facts, the order of payment is: (1) creditors; (2) loans to partners; (3) capital paid back to partners that they invested; (4) divide up any remaining money so partners are paid their share of profits. For a problem like this, one way you might try to attack it is to first try to figure out what is owed and what is not (or what is an 'asset'). Thus, $70,000 (creditors) + $60,000 (loans to partners) = $130,000 owed so far. The problem tells you there are $190,000 in assets ($100,000 assets + another $90,000 in profits (profits are an asset) = $190,000 in assets). $190,000 (assets) minus $130,000 (owed) = $60,000 left over; which can then go to the partners to pay them for their due and owing capital balances.
Beau and Candy are the only general partners in a limited partnership. Each has contributed capital of $40,000. Maggie and Cosmo are the only limited partners in the firm. Maggie has contributed capital of $40,000. Cosmo has contributed capital of $80,000. The limited partnership has a profit of $180,000 to distribute. Under the Revised Uniform Limited Partnership Act (RULPA) rule for sharing of profits, what is Cosmo's share of the profit?
$72,000
14. Xavier, Yancey and Zebulon were partners in the XYZ Partnership. Their partnership agreement stated that Xavier would bear 60 percent of partnership losses, with Yancey and Zebulon each bearing 20 percent of partnership losses. XYZ's business failed, with various partnership debts being left unpaid. After all partnership assets had been exhausted for the benefit of the firm's creditors, $90,000 remained due and owing to the creditors. On these facts, how much may the creditors lawfully collect from Zebullon?
$90,000 [Remember that an agreement between/among partners as to how they will divide profits/losses is not binding on a creditor was/is not a party to that agreement! And, as you know, one of the downsides of being a partner in a partnership is that you are personally liable for partnership debts if the partnership assets are insufficient to satisfy the monies owed to creditors!!]
Of the following statements concerning shares of stock issued by a corporation, which is inaccurate?
A corporation is barred by law from issuing shares of stock for an amount greater than par value.
The attributes of a limited liability partnership (LLP) are:
A partner's liability for his partners' professional malpractice is limited to the partnership's assets. b. A partner retains unlimited personal liability for his/her own malpractice c. A partner retains unlimited personal liability for all non-professional E. A,B,C
Which of the following is an accurate statement about limited liability companies (LLCs)?
An LLC pays no federal income tax; instead, income of an LLC is reported by its members on their tax returns.
In negotiating contracts for a corporation, the role of the promoter (or incorporator) can best be described as:
An agent of the yet to be formed corporation
A limited liability company (LLC) must file what document with the Secretary of State?
Articles of organization.
Bob and Harry form a partnership to invest in rental property in a college town. Bob and Harry each initially invested $600,000 into the partnership, but they did not execute a written partnership agreement. Of the time spent locating properties to buy, finding tenants, and maintaining buildings, etc., Bob was responsible for 80 percent of the effort and Harry 20 percent. Both Bob and Harry accepted that Bob was devoting far more time to the partnership than Harry was. At the end of the year, Bob assumed that he would be allocated 80 percent of the profits. Harry wants to split the profits evenly. Which of the following is true?
Bob and Harry will split profits evenly.
A partner may, for his own financial benefit, engage in the same business as that of the partnership if he does so on his own time.
F [No. To do so he violates his fiduciary "duty not to compete" against the partnership.]
22. A new partner who has joined an existing partnership has no liability whatsoever for partnership debts that existed before he became a partner.
False
A partner who wrongfully causes a dissolution of the partnership nevertheless remains entitled to his/her share of the goodwill of the business.
False
Although the addition of a new limited partner does not cause a dissolution of the former limited partnership, the addition of a new general partner does have that effect.
False
As a general rule, the owners of a corporation's common shares do not possess voting rights with regard to the election of corporate directors.
False
The addition of a new partner causes a dissolution of the former partnership, as well as the creation of a different partnership, because the addition of the new partner brings about a change in the composition of the former partnership.
False
The insolvency (i.e., bankruptcy) of a partner does not cause a dissolution of the partnership.
False
Although a partner in an accounting firm organized as an ordinary partnership cannot be held personally liable for the negligence of another partner, such vicarious liability can be imposed on the "innocent" partner if the accounting firm is organized as a limited liability partnership (LLP).
False He/She can be held liable in an ordinary partnership. Further, in an LLP such an innocent partner cannot be held liable for the negligence/professional malpractice of his/her partner in the LLP
No partner has the power to dissolve the partnership before the expiration of the duration established in the partnership agreement.
False Partner's have the power to do so (i.e., the right to disassociate themselves from the partnership by, for example, withdrawing from the partnership), but not the legal right to do so
A partner's liability for partnership debts is limited to the amount of his capital contribution to the partnership.
False He/She has unlimited personal liability for such debts!
If a partner's exercise of judgment concerning a transaction caused the partnership to experience a loss, that partner "necessarily" (i.e., automatically and always) will be liable to the partnership for the amount of the loss.
False If the partner caused such a loss due to his negligence or intentional tort, then, of course, he would be liable to the partnership for any loss; but if that is not present or the case, then he/she would not be responsible for such loss.
Either sharing profits or sharing management is, by itself, ordinarily considered conclusive evidence of a partnership.
False It is not conclusive by itself; it's only "evidence of" a partnership.
Although they are corporations, limited liability companies (LLCs) differ from other/regular corporations in that members of LLCs, unlike shareholders in corporations, are individually liable for LLC obligations.
False LLCs are the same as regular corporations in this regard.
Because the federal government has control over interstate commerce, a business in interstate commerce and organized under the corporate form must become incorporated pursuant to federal incorporation statutes.
False No. It's a state incorporation statutes.
A promoter will remain liable on a contract made by him on behalf of a proposed corporation only if the corporation is never formed.
False Not only.
When a partnership is dissolved, even a partner who wrongfully caused the dissolution may demand a winding up of the partnership.
False See the discussion on "Dissolutions"
If a partner causes the partnership to experience a loss as a result of a transaction concerning which she had apparent authority but neither express nor implied authority, she is not liable to the partnership for the amount of the loss.
False She is liable to the partnership for such loss
One result of pressures and proposals for changes in corporate governance is that corporate boards of directors tend to have more inside directors, and hence fewer independent outside directors, than they once had.
False The exact opposite is true.
In the modern corporation, the board of directors makes most of the day-today management decisions.
False The officers of the corporation do this, not the directors.
A principal advantage, to shareholders, of the corporate form of business is that the money they have invested in the corporation is not at risk of being lost because of the claims of creditors of the corporation.
False Their invested money is at risk. It's personal liability they are protected from when they form a corporation.
Unlike shareholders of a publicly held corporation, shareholders of a close corporation do not have limited liability for corporate debts.
False They do have such protection/limited liability.
The Revised Uniform Limited Partnership Act's (RULPA's) provision on post-dissolution distribution of limited partnership assets allows the partners to eliminate the priority position of creditors by agreeing unanimously that creditors' claims will be paid after the partners have received the return of their capital.
False This is obviously false. Think of the unfairness that would result to creditors if such partners could do this!
24. A partner who withdraws from an existing partnership remains liable for all partnership obligations that existed as of the time of her withdrawal, but her legal liability is limited to the extent of her investment in the partnership assets.
False [Liability extends to personal unlimited liability for such debt and obligations!! It is NOT limited to just her share of the partnership assets!]
A limited liability company (LLC) pays federal income tax just as a corporation does.
False [No. The members of an LLC pay federal income tax in their individual tax returns; while a regular corporation files a corporate tax return and pays tax on its income.
In which of the following types of partnerships is the liability (limited liability as in loss of capital investment, and/or, unlimited liability -- as in personal liability) the same for all partners?
General Partnership. Limited Liability Partnership.
Prior to the incorporation of Pyle Co. (a manufacturing business), Gomer, who was acting as a promoter for Pyle, negotiated a contract for the purchase of manufacturing equipment from Sergeant-Carter Corp. The contract was entered into on behalf of and in the name of Pyle Co. Shortly thereafter, a certificate of incorporation was issued to Pyle Co. by the Secretary of State. In view of the facts just stated, which of the following statements is accurate?
Gomer is liable on the contract with Sergeant-Carter Corp.
Arthur and Alan decided to open a retail store and to operate the business as a partnership. Because they needed additional funds to get the business in operation, they asked Jayne whether she would like to invest money in business and become a limited partner. Assuming that Jayne becomes a limited partner, which of the following statements is accurate?
Jayne will not have personal liability for partnership debts, although it is possible that partnership losses may be so significant that she will lose the money she invested in the business.
When a new partner is admitted to a preexisting partnership, the new partner has:
Liability to the extent of her investment in the partnership for obligations from before joining the partnership, and unlimited liability for those arising afterwards.
Jan, Dan and Stan have developed a new type of skateboard and are discussing forming a business to manufacture and sell this product. They realize that the use of this skateboard can result in injuries, and that at least a few users will likely suffer injuries. Jan, Dan and Stan all would prefer that the business be taxed as a partnership. Which of the following entities can they choose to obtain limited liability for all of the owners (i.e., themselves) and at the same time be taxed like a partnership?
Limited liability company and S corporation.
The owners of a limited liability company (LLC) are called:
Members.
13. Of the following statements concerning criminal liability of partners and partnerships to be convicted of crimes, which is/are inaccurate?
Most modern criminal codes do not allow partnerships to be convicted of crimes.
Which of the following is an inaccurate statement about limited liability companies (LLCs)?
Most states that have LLC statutes require that an LLC have at least three, but no more than ten, members.
Assuming there is no agreement or restrictions on the issue of shares/stock in a corporation, in order to transfer shares owned by a shareholder, the shareholder must obtain the approval of:
Neither the board of directors nor the other shareholders.
Nimrod served as a promoter concerning Flaky Industries, Inc. prior to its incorporation. During the pre-incorporation period, Nimrod purchased manufacturing equipment in contemplation of selling it to the corporation once it was formed. After Flaky was properly incorporated, Nimrod sold it the equipment for $90,000. He did not tell the Flaky directors that the equipment had cost him only $50,000. In light of the facts, which of the following statements is accurate?
Nimrod's continuing fiduciary duty to the corporation was violated when he failed to make a full disclosure concerning what he had paid for the equipment; therefore, Flaky may rescind (i.e., cancel) the purchase or recover Nimrod's profit.
Maggie and Cosmo agreed that they would become partners in a pet supplies business. However, they never actually conducted the business together. Instead, Cosmo operated the pet supplies business by himself and Maggie kept her job as a security guard. In order to obtain pet supplies on credit, Cosmo told the supplier that Maggie was his partner. The supplier extended credit to the business in reliance on Cosmo's statement that he and Maggie were partners. When the pet supplies business failed and Cosmo did not pay the supplier what was owed, the supplier sued both Cosmo and Maggie in effort to collect payment of the debt. Is Maggie liable to the supplier?
No, because Maggie and Cosmo never operated the business together.
Chip is one of the limited partners and Skip and Bambi are the general partners in a certain limited partnership. The business of the limited partnership is investing in works of art. Chip has received reliable information indicating that Skip and Bambi have been buying and selling some works of art on their own, without making the opportunities available to the limited partnership. Although Chip would like to bring a derivative suit against Skip and Bambi on the theory that they breached their fiduciary duties to the limited partnership, he is concerned that by doing so, he may forfeit his limited liability (as a limited partner). Will he lose his limited liability if he brings the derivative suit?
No, because a limited partners' attempt to enforce other partner's fiduciary duties does not constitute exercising control over partnership business.
Austin Tatious is a director of Blowhard, Inc. Needing additional office space, Blowhard sought to purchase a new corporate headquarters. Tatious owned a suitable building that he had purchased for $900,000 several years earlier. The six directors other than Tatious voted to purchase the property after Tatious informed them of what he had paid for the property. The sale was then completed at a price of $1.4 million, the fair market value of the property as of the time of the sale. A Blowhard shareholder later brought a derivative suit against Tatious in an effort to recover, for the benefit of the corporation, the profit made by Tatious on the sale of the building. Is Tatious liable to the corporation for the profit he made?
No, because he made a full disclosure to a disinterested board, which approved a transaction that was fair to Blowhard.
Hoping to gain an edge in the highly competitive electric razor market, the directors of Cutting Edge Corp. (CEC) voted to have CEC develop and market a revolutionary type of electric razor sold by CEC for years as its flagship product. Before so voting, the CEC directors studied past price and sales data, future projections in those regards, and considerable technical information concerning the new type of razor. In addition, they consulted economists and various financial experts. The new razor was a commercial flop. CEC lost many millions of dollars as a result. Although it eventually went back to producing the type of razor it formerly produced and thereby regained some customers that had been lost along the way, CEC's market position was badly, and probably permanently, weakened. A group of disenchanted CEC shareholders has now sued the directors in an attempt to hold them liable to CEC for the consequences just mentioned. Will the directors be held liable?
No, because the business judgment rule insulates the directors from liability here, despite the harm their decision caused the corporation to experience.
Cosmo and frank have been partners in a clothing sale business for several years. Their partnership agreement sets forth a duration that will not expire for four more years. Cosmo has found that it takes considerable effort to get along with Frank, who is a moody person with a gruff manner. The two of them have had numerous disagreements through the years. Tired of dealing with Frank, Cosmo has filed suit against him in an effort to obtain a court-ordered dissolution of the partnership. Will the court grant the requested dissolution?
No, if the business is profitable. See the "Dissolution" discussion in the master/study outline in your University Readers book. You will see that unless the partnership agreement provides to the contrary, a disagreement among the partners that does NOT threaten partnership assets or profitability is NOT enough to cause a dissolution of the partnership. Thus, beware who you become partners with!!!]
When a promoter enters into a contract on behalf of a corporation that is not yet formed, the corporation will become liable on the contract:
Only if the board of directors of the corporation, once it is formed, agrees to
W, X, Y, and Z are partners in WXYZ Partnership. W committed a tort upon Plaintiff. Assume that under applicable law, X, Y, and Z are vicariously liable for that tort as well. Of the following statements concerning the facts, which is accurate?
Plaintiff would be permitted to sue X, Y, and Z and enforce her claim against any of them if she so chooses.
What is the basic paperwork needed/required to create a limited liability company (LLC)?
Prepare the Articles of Organization and file them with the state.
Jacques Strappe operates a sporting goods store. As a means of repaying debts owed to Clete Marx, Strappe granted Marx a share of the profits made in the sporting goods store business. In addition, Strappe and Marx agreed that Strappe would consult Marx before incurring any additional business-related debt from other sources. Are Strappe and Marx partners?
Probably not, because the Strappe-Marx relationship is more of a debtor and creditor.
Dividends may only be paid out of which of the following?
Retained earnings.
Rover Corporation is a regular corporation that has not elected S corporation status. In 2000, Rover earns $100,000 in net income; that same year, 2000, Rove declares and distributes $50,000 in dividends to its shareholders and it pays these dividends out of its retained earnings (i.e., the money left over from the $100,000 after it pays corporate income tax to the government). Which of the following best describes the tax consequences to Rover and its shareholders?
Rover is taxed on $100,000 in 2000; the shareholders are taxed on the $50,000 in dividends in 2000
In which of the following forms of business organization can the entity and owner(s) avoid the problem of double taxation?
S corporation. Limited liability company
Which of the following may be done without the unanimous consent of the partners in an ordinary partnership?
Selling items of the partnership's inventory in the ordinary course of business in which the partnership is engaged.
Corporate stock may not be sold (or issued) for:
Services to be rendered to the corporation in the future.
The authority/legal basis for the formation of limited liability companies (LLCs) comes from:
State statutes.
What is the effect of a partner assigning her partnership interest in a partnership to another person (called an "assignee")?
The assignee obtains the assigning partner's rights to profits in the partnership, but no rights in the management of the partnership.
What is the effect of having a corporation as the general partner of a limited partnership?
The liability of the corporate general partner will be limited to the amount of its corporate assets.
According to the study outline in your University Readers book, which of the following events causes the dissolution of a partnership?
The partnership's accomplishment of its objective.
Which of the following is not required to be included in a Certificate of Limited Partnership?
The portion of profits to be distributed to each limited and general partner.
Olive is a partner in Oil Ltd. One of Olive's personal creditors, Castor, has obtained a judgment against Olive, as well as a charging order against Olive's interest in Oil Ltd. What right (s) does Castor have?
The right to receive Olive's share of the partnership profits. Note that a charging order is a court order that allows a creditor to attach a partner's interest in a partnership (i.e., his/her share of the profits). It does NOT allow the creditor to become a partner, participate in the management of the partnership, etc. Further, if you review that section of your University Readers book closely, you will see that a charging order is something very different than an "assignment-of-apartnership interest", so be sure to see and read that section closely so you will know and understand the difference between the two!!
Nimble was a general partner in Shaky Limited Partnership prior to the firm's dissolution. Before the dissolution, Nimble loaned the firm $10,000. The loan was not repaid before the dissolution took place. Shaky also owes debts to creditors X, Y, and Z. When Shaky's assets are liquidated and distributed, what priority does the RULPA give to Nimble's claim for repayment of the loan, in relation to the priority given to the claims of X, Y, and Z?
The same priority given to the claims of X,Y, and Z, because in this situation Nimble is considered a creditor of the firm.
Which of the following is a reason to form a limited liability company (LLC) rather than an S corporation?
There is no limit on the number of owners of a limited liability company whereas the number of shareholders of an S corporation is limited.
Which of the following is true about operating agreements for limited liability companies (LLCs)?
They are not required, but are highly recommended (i.e., prudent members of an LLC should prepare and sign, but are not required to prepare and sign, an operating agreement).
Which of the following is an accurate statement concerning subchapter S corporations?
They are treated much as partnerships are treated for federal income tax purposes.
Which of the following is true about limited liability companies (LLCs)?
They can choose/elect whether to be taxed as a partnership or corporation.
If a limited liability company (LLC) fails to follow formalities such as keeping minutes of meetings, then:
This failure may result in imposing personal liability on its members.
23. A partner who conducts the winding up of partnership affairs ordinarily is not entitled to special compensation or payment for conducting that winding up process.
Trie
A partner does not have the right to use partnership property for his own personal purposes even if the partnership agreement is silent on that issue.
True
A shareholder may be held personally liable to the corporation's creditor if the corporation and the shareholder have depleted corporate assets by engaging in less-than-arm's length transactions with each other.
True
Absent a contrary provision in the limited partnership agreement, a limited partner's withdrawal from the firm/LP does not result in dissolution of the limited partnership.
True
Although a limited liability company (LLC) and its members receive the same federal tax treatment as an S Corporation and its shareholders, the LLC does not share the S Corporation's limits on number and types of owners.
True
Although publicly held corporations and close (i.e., privately held) corporations are generally treated alike under the various states' corporation laws, some states give close corporations greater latitude and flexibility in regulating their internal affairs than is given to publicly held corporations.
True
Corporate directors may cause corporate funds to be contributed to charity regardless of whether the shareholders have voted to make such a contribution.
True
Directors may forfeit the protection of the business judgment rule if their decision to oppose a tender offer (from an outside firm/individual for the purchase of the corporation) resulted from an inability on the part of the directors to separate their own interests in remaining directors from the best interests of the corporation.
True
Even though corporations are artificial legal entities rather than natural persons, they obtain the benefit of the due process guarantees given by the U.S. Constitution.
True
If a limited partner assumes personal liability on a specific partnership obligation, she does not thereby forfeit her limited liability concerning other partnership obligations.
True
If a partner in a mining partnership "transfers" (i.e. "assigns") her partnership interest to another party (the transferee) without the consent of the other partners, the transferee is not a partner in the mining partnership.
True
In order for a partnership to guarantee the debt of another party, all of the partners must agree to do so, if the giving of that guarantee is "outside the course and scope" of the partnership's normal business.
True
In some states , those who make wholly defective and ineffective attempts to incorporate a business (e.g., such as failing to prepare and file articles of incorporation, or, failing to create and adopt corporate bylaws) may be treated as partners with unlimited liability for the obligations of the business.
True
Unless they have reached an agreement to the contrary, partners share the partnership's losses according to/based on the number of partners in the partnership.
True
When a limited partnership is dissolved and there are no general partners who have not wrongfully dissolved the firm, a limited partner may perform the winding up of partnership affairs.
True
A person may have the liability of a partner even though she is not in fact anyone's partner.
True E.g., via the doctrine of partnership by estoppel
The broad implied authority of a partner normally would not include the implied authority to sell the partnership's real property on behalf of the partnership
True The selling of real estate is such a big thing/deal that in most cases it would not be considered to be a part of a partner's implied authority to act on behalf of the partnership
In states that have enacted limited liability partnership (LLP) statutes, the liability of a partner in an LLP for his partners' malpractice is limited to the partnership's assets.
True As a general rule this is true.
A proper certificate of limited partnership need not state the name of each limited partner.
True It need only state the name of the general partner
The value of an outgoing partner's interest in the partnership is determined as of the time of dissolution.
True Note that when a partner leaves and a dissolution occurs, that partner will need to be "cashed out" (i.e., paid/compensated for his share and value of and in the partnership.
A restriction on a partner's express or implied authority does not prevent that partner from having apparent authority
True See the discussion on express, implied and apparent authority
9. Under federal tax law, income tax is not imposed on the partnership.
True It is imposed on the individual partners on the tax returns they file as individuals; not on the partnership entity
Dissolution does not automatically end the business of a partnership.
True This is true because the remaining partners can elect to continue the business/the partnership
When may the non-withdrawing partners continue the partnership business?
When the partnership agreement permits it. b. When the withdrawing partner has dissolved the partnership in violation of the partnership agreement. c. When the withdrawing partner dissolved the partnership nonwrongfully, and he and all of the non-withdrawing partners agree to the continuation. d. In each of the above situations. D.
Otto and Edna have been partners in a used car business for five years. Last year, Edna bought ten used cars with her own money and then sold them on her own time. She made profits totaling $8,000 on the sales. Is Otto entitled to an appropriate share of the $8,000?
Yes, because Edna owed Otto and their partnership a duty not to compete with the partnership business.
. Jim acted as a promoter for Tammy Co. prior to its incorporation. He negotiated a contract with Plaster, Inc. Under the contract, which Jim signed in the name of Tammy Co., Plaster was to supply Tammy with essential ingredients and substances that Tammy would use in its makeup manufacturing operation. At the initial board of directors meeting following the incorporation of Tammy, the Tammy board adopted the contract Jim had negotiated with Plaster. After Plaster had performed its contract obligation but before Tammy paid what was called for by the contract, Tammy became insolvent and unable to make payment. Plaster is now looking to Jim for payment. Is Jim liable to Plaster?
Yes, because nothing in the facts indicates that Plaster has released Jim from liability on the contract
Margaret is one of the 11 directors of Specific General, Inc. Although they had not so informed the board of directors, top officers of Specific General were giving serious consideration to obligating the company on a long-term contract that would involve the expenditure of millions of dollars of company funds. Margaret learned of the officers' intentions through a reliable source. Because she opposed the plan, she sought to examine Specific General's books and records in order to gain information that would support her position. The officers refused her inspection request because the request did not come from the full board. May Margaret obtain a court order requiring the corporation and its officers to produce the books and records for her examination?
Yes, because the books and records contain information essential to the performance of her duties.
Larry Legbreaker, a partner in a used car sales business, was authorized by his partners to repossess cars from purchasers who had failed to make the agreed installment payments. This included "doing whatever it took to get the job done." While repossessing a car from Todd Pockmarkt, Legbreaker convinced an initially reluctant Pockmarkt to be cooperative by shoving him to the ground. Pockmarkt sustained a brain concussion when his head struck the concrete driveway where the car being repossessed was parked. If Pockmarkt sues for damages stemming from Legbreaker's battery, will Legbreaker's partners in the used car business be held liable?
Yes, because the tort was committed while Legbreaker was within the scope of an action for the partnership.
11. Ace Deuce is one of the partners in a retail hardware store business (which is considered a "trading partnership"). The partnership frequently must borrow money in order to purchase inventory and satisfy other operating requirements. Needing money to pay some personal debts, Deuce recently borrowed $15,000 from Tenth National Bank. He signed the name of the partnership on all documents connected with the loan. Although he informed Tenth National that the money was for the partnership, he actually used the money only for himself. Deuce is now unable to repay the debt. Is the partnership liable to Tenth National for the debt?
Yes, because this partnership is a trading partnership for which borrowing is considered to be in the ordinary course of its business Note that a "trading partnership" is a partnership that has an inventory; that is, its regular business is buying and selling merchandise such as retailing, wholesaling, importing and exporting. For example, a toy store and a clothing store are trading partnerships. Since there is a time lag between the date they pay for their inventory and the date they sell inventory to their customers, these firms ordinarily need to borrow to avoid cash flow problems. Therefore, a partner of a trading partnership (like the one that is the subject of this question), has the implied and apparent authority to borrow money for the partnership!!
Average Corp.'s directors left all management and policy decision to the discretion or the corporation's officers. The directors held annual meetings, but made no detailed inquiries into operation or performance of the corporate business. Average suffered heavy losses for three successive years, until it was discovered that the officers in charge of daily management of the business had been diverting substantial portions of corporate assets for their own personal use. Will the directors face liability to the corporation for losses experienced by the corporation?
Yes, if their approach to management amounted to a failure to act as ordinarily prudent directors would have acted under the same or similar circumstances, and if the exercise of due care by the directors would have resulted in an earlier discovery of the officer's improper actions.
Boris and Natasha agreed to operate a waterbed sales business together and to split the profits made thereby. Although they began operating the business together and splitting the profits, they never signed a formal partnership agreement. Are they partners?
Yes, in all likelihood, even if they did not expressly call their relationship a partnership.
Absent a contrary provision in the partnership agreement, a partnership becomes dissolved without a court order to that effect if:
a partner dies.
The articles of incorporation must include:
a statement of the number of shares of stock that the corporation has authority to issue.
In a partnership, the partners have a "duty to account" for:
a. Any purchases they make for the partnership. b. Any sale of partnership property. c. Any funds received by them as agents of the partnership. d. All of the above. Answer: D
Hamlet, Ophelia, Othello, and Desdemona were partners in a dissolved partnership, HOOD Enterprises, whose business was the manufacturing and sale of widgets. Ophelia is conducting the winding up of the partnership business. HOOD has a contract to supply 20,000 widgets to the We R Widgets chain of stores. Performance of the contract has not yet begun. In addition, HOOD has 35,000 unsold widgets in stock. HOOD also owns the building in which the manufacturing operation has been conducted. For which of the following does Ophelia possess express or implied authority during the winding up process?
a. Painting the building in preparation for selling it. b. Selling the 20,000 widgets to We R Widgets. c. Selling the building. d. Each of the above. D.
The order of distribution of partnership assets upon dissolution is:
first to satisfy outside creditors' claims; then to repay to partners any loans they made to the firm; then to repay partners their capital contributions made to get (or keep) the partnership going; then to pay partners' their shares of profits.
If a partner causes the wrongful dissolution of the partnership,
he loses the right to demand that the partnership business be wound up.
A corporation:
is a legal entity separate from those who own the corporation even if the corporate ownership consists of a single shareholder.
22. The liability of an incoming partner for partnership obligations arising after she becomes a partner:
is unlimited in extent and scope. such a partner would lose her capital investment/contribution she made to become a partner (to "buy into" the partnership), and, she would remain personally liable for such obligations!!
In winding up the affairs of a partnership, the partners doing the winding up:
may borrow money and create an accompanying partnership obligation if doing so would preserve partnership assets or enhance their sale value.
A corporation's bylaws:
may supplement the articles of incorporation by more precisely defining rights and responsibilities of parties involved in the corporate structure.
Roy, Rhonda, and Reggie are partners in Triple R Investments. Roy has proposed to sell the partnership an office building her personally owns. Rhonda and Reggie, who have agreed that the partnership should make the purchase, do not know that Roy is the owner of the office building. The building is located in another city and will not be inspected by Rhonda and Reggie before the purchase takes place. Roy is aware, but Rhonda and Reggie are not aware, that the building needs a complete electrical rewiring job whose cost would be several thousand dollars. The price Roy has agreed to accept for the building is $275,000 — a fair price given the building's location, condition, (including the need for the rewiring), and other pertinent factors. On these facts, Roy
must disclose, before the purchase takes place, the fact that he owns the building and that the building needs rewiring; otherwise, he will violate his duty to the partnership to not self-deal.
Sam Sham promoted Pharaoh Co. prior to its incorporation. He spent a considerable amount of time, as well as $3,500 of his own money, in promoting the corporation. Pharaoh has now been incorporated and its business is in operation. On these facts, Pharaoh is:
neither obligated to reimburse Sam for his expenses nor obligated to compensate him for his time and services.
5. A partner has the implied authority to bind the partnership:
on contracts that are usually appropriate for the business in which the partnership is engaged.
"Partnership property":
ordinarily includes property purchased with partnership funds for use by the partnership.
Shareholders of a corporation:
ordinarily play little role in the day-to-day management of the corporate business.
According to the law governing partnerships,
partners do not own partnership property in individual proportionate shares.
Courts will allow the "piercing of the corporate veil":
whenever a parent corporation's domination of its wholly-owned subsidiary was for an improper purpose.
