SU 15
Which of the following statement(s) is (are) usually true regarding general partners' liability? I. All general partners are jointly and severally liable for partnership torts. II. All general partners are liable only for those partnership obligations they actually authorized. A. I only. B. II only. C. Both I and II. D. Neither I nor II.
A. I only. Explanation: Partners are jointly and severally liable for the torts committed by another partner who acted within the ordinary course of the partnership business or with the authorization of the other partners. Joint and several liability means that all of the partners are liable, but a third party may hold any partner liable for the entire amount. Because a general partner is an agent of the business, (s)he has apparent authority to bind the partnership to contracts with third parties formed while carrying on the partnership business in the usual way.
Fil and Breed are 50% partners in F&B Cars, a used-car dealership. F&B maintains an average used-car inventory worth $150,000. On January 5, National Bank obtained a $30,000 judgment against Fil and Fil's child on a loan that Fil had cosigned and on which Fil's child had defaulted. National sued F&B to be allowed to attach $30,000 worth of cars as part of Fil's interest in F&B's inventory. Will National prevail in its suit? A. No, because the judgment was not against the partnership. B. No, because attachment of the cars would dissolve the partnership by operation of law. C. Yes, because National had a valid judgment against Fil. D. Yes, because Fil's interest in the partnership inventory is an asset owned by Fil.
A. No, because the judgment was not against the partnership. Explanation: National will not prevail. Fil was not acting as a partner, that is, carrying on in the ordinary course (1) the partnership business or (2) business of the kind carried on by the partnership. Thus, when Fil cosigned the loan, National was not reasonably induced to rely on Fil's apparent authority as a partner-agent of the partnership. Fil therefore did not bind the partnership to the loan agreement. Furthermore, the partnership was not a party to the suit that resulted in a judgment against the partner and the child, and National had no basis for recovery from the partnership. Its remedy as a judgment creditor is against Fil but not specific partnership property. Fil has no interest in specific partnership property that is transferable or can be attached. Instead, the judgment creditor may attach the partner's transferable interest in the partnership by securing a charging order from a proper court. A charging order is a lien on the transferable interest. The court may order foreclosure of the interest at any time. After the order, the debtor partner's interest is sold at a judicial sale. Before the sale, the debtor, the other partners, or the partnership itself may redeem the interest by paying the debt.
Park and Graham entered into a written partnership agreement to operate a retail store. Their agreement was silent as to the duration of the partnership or its purposes. Which of the following statements is true? A. Park may dissociate from the partnership at any time. B. Unless Graham consents to a dissolution, Park must apply to a court and obtain a decree ordering the dissolution. C. Park may dissolve the partnership by any reasonable means. D. Park may dissolve the partnership only after notice of the proposed dissolution is given to all partnership creditors.
A. Park may dissociate from the partnership at any time. Explanation: A partner has the power (if not the right) to dissociate at any time. The partnership may not be dissolved by dissociation of a partner unless it is by notice of the express will of that partner to withdraw. A statement of dissociation may be filed by the partnership or dissociating partner. Within 90 days after filing, notice of dissociation terminates the partner's apparent authority and post-dissociation obligations.
Which of the following is false regarding the taxation of a sole proprietorship? A. Sole proprietorships are subject to tax at both the business and individual level. B. All business deductions and losses carry straight through to the proprietor. C. Income of the business must be reported by the proprietor. D. The sole proprietorship only requires the filing of one return.
A. Sole proprietorships are subject to tax at both the business and individual level. Explanation: The proprietor and proprietorship are not distinct entities. All business income and loss is reported by the proprietor on his or her return. As a result, two major tax advantages of the sole proprietor are the need to file only one return and the avoidance of double taxation of corporate earnings paid as dividends.
D, E, F, and G formed a general partnership. Their written partnership agreement provides that the profits will be divided so that D will receive 40% E, 30%; F, 20%; and G, 10%. There is no provision for allocating losses. At the end of its first year, the partnership has losses of $200,000. Before allocating losses, the partners' capital account balances are D, $120,000; E, $100,000; F, $75,000; and G, $11,000. G refuses to make any further contributions to the partnership. Ignore the effects of federal partnership tax law. What is G's share of the partnership losses? A. $9,000 B. $20,000 C. $39,000 D. $50,000
B. $20,000 Explanation: The partnership agreement, to the extent it allocates partnership losses among partners, governs. Without an agreement, a partner shares losses in the same proportion (s)he shares profits. The partnership agreement, to the extent it allocates partnership profits among partners, governs. Thus, G's share of the losses is 10% of $200,000.
Gillie, Taft, and Dall are partners in an architectural firm. The partnership agreement is silent about the payment of salaries and the division of profits and losses. Gillie works full-time in the firm, and Taft and Dall each work half-time. Taft invested $120,000 in the firm, and Gillie and Dall invested $60,000 each. Dall is responsible for bringing in 50% of the business, and Gillie and Taft 25% each. How should profits of $120,000 for the year be divided? Gillie Taft Dall A. $60,000 $30,000 $30,000 B. $40,000 $40,000 $40,000 C. $30,000 $60,000 $30,000 D. $30,000 $30,000 $60,000
B. $40,000 $40,000 $40,000 Explanation: Partners are not entitled to compensation for their actions, skill, and time applied on behalf of the partnership, except when such an arrangement is explicitly provided for in the partnership agreement. The partnership agreement is silent on this point, so salaries are not paid to the partners. Profits and losses may be divided among the partners according to any formula stated in the partnership agreement. Without a contrary agreement, partners share equally in the profits. Thus, each partner will receive $40,000.
What business entity can be voluntarily dissolved and terminated without filing a dissolution document with the state of organization? A. A corporation. B. A general partnership. C. A limited liability partnership. D. A limited partnership.
B. A general partnership. Explanation: In a partnership at will, dissolution results from notice of a partner's express will to withdraw and certain other events. No filing is required, but a statement of dissolution may be filed by any partner who has not wrongfully dissociated.
In a general partnership, which of the following acts must be approved by all the partners? A. Dissolution of the partnership. B. Admission of a partner. C. Authorization of a partnership capital expenditure. D. Conveyance of real property owned by the partnership.
B. Admission of a partner. Explanation: The right to choose associates means that no partner may be forced to accept any person as a partner. The RUPA states, "A person may become a partner only with the consent of all of the partners." When a partner transfers his or her interest to another, the purchaser or other transferee is entitled only to receive the share of profits and losses and the right to distributions allocated to the interest (s)he has acquired.
Ann Grand, a general partner, retired. The partnership held a testimonial dinner for her and invited 10 of its largest customers. A week later a notice was placed in various trade journals indicating that Grand had retired and was no longer associated with the partnership in any capacity. After the appropriate public notice of Grand's retirement, which of the following best describes her legal status? A. The release of Grand by the remaining partners and the assumption of all past and future debts of the partnership by them via a hold-harmless clause constitutes a novation. B. Grand has the apparent authority to bind the partnership in contracts she makes with persons unaware of her retirement who have previously dealt with the partnership. C. Grand has no liability to past creditors upon her retirement from the partnership if they all have been informed of her withdrawal and her release from liability. D. Grand has the legal status of a limited partner for the 3 years it takes to pay her the balance of the purchase price of her partnership interest.
B. Grand has the apparent authority to bind the partnership in contracts she makes with persons unaware of her retirement who have previously dealt with the partnership. Explanation: Under the RUPA, a dissociated partner continues to be able to bind the partnership for up to 2 years after dissociation if other parties reasonably believe that the dissociated partner is still a partner and do not have knowledge or notice of the dissociation. A statement of dissociation must be filed by the partnership or a dissociated partner to terminate the partner's apparent authority and his or her liability for the partnership's post-dissociation obligations. But after the statement is filed, it is not deemed to provide notice for 90 days.
Laura Lark, a partner in DSJ, a general partnership, wishes to withdraw from the partnership and sell her interest to Ward. All of the other partners in DSJ have agreed to admit Ward as a partner and to hold Lark harmless for the past, present, and future liabilities of DSJ. As a result of Lark's withdrawal and Ward's admission, Ward A. Acquired only the right to receive Lark's share of DSJ profits. B. Has the right to participate in DSJ's management. C. Is personally liable for partnership liabilities arising before and after being admitted as a partner. D. Must contribute cash or property to DSJ to be admitted with full partnership rights.
B. Has the right to participate in DSJ's management. Explanation: The other partners agreed to admit Ward as a partner. Accordingly, Ward is vested with all partnership rights, duties, and powers, including the right to participate in management.
Fact Pattern: Ted Fein, a partner in the ABC Partnership, wishes to withdraw from the partnership and sell his interest to Ian Gold. All of the other partners in ABC have agreed to admit Gold as a partner and to hold Fein harmless for the past, present, and future liabilities of ABC. A provision in the original partnership agreement states that the partnership will continue upon the death or withdrawal of one or more of the partners. As a result of Fein's withdrawal and Gold's admission to the partnership, Gold A. Is personally liable for partnership liabilities arising before and after his admission as a partner. B. Has the right to participate in the management of ABC. C. Acquired only the right to receive Fein's share of the profits of ABC. D. Must contribute cash or property to ABC to be admitted with the same rights as the other partners.
B. Has the right to participate in the management of ABC. Explanation: Without a contrary agreement, a new partner is entitled to all of the rights of a partner described in the RUPA. Gold therefore has the right to participate in ABC's management.
Cobb, Inc., a partner in TLC Partnership, assigns its partnership interest to Bean, who is not made a partner. After the assignment, Bean may assert the rights to I. Participation in the management of TLC II. Cobb's share of TLC's partnership profits A. I only. B. II only. C. I and II. D. Neither I nor II.,
B. II only. Explanation: Partnership rights may be assigned without the dissolution of the partnership. The assignee is entitled only to the profits the assignor would normally receive. The assignee does not automatically become a partner and would not have the right to participate in managing the business or to inspect the books and records of the partnership. The assigning partner remains a partner with all the duties and other rights of a partner.
Leslie, Kelly, and Blair wanted to form a business. Which of the following business entities does not require the filing of organization documents with the state? A. Limited partnership. B. Joint venture. C. Limited liability company. D. Subchapter S corporation.,
B. Joint venture. Explanation: A joint venture is an association to accomplish a specific business purpose. It is easily formed and is often organized for a single transaction. No statute requires a filing to create a joint venture.
Unless otherwise provided for in the partnership agreement, the assignment of a partner's interest in a general partnership will A. Result in the termination of the partnership. B. Not affect the assigning partner's liability to third parties for obligations existing at the time of the assignment. C. Transfer the assigning partner's rights in specific partnership property to the assignee. D. Transfer the assigning partner's right to bind the partnership to contracts to the assignee.
B. Not affect the assigning partner's liability to third parties for obligations existing at the time of the assignment. Explanation: The RUPA allows the transfer of a partner's transferable interest without the dissolution of the partnership or dissociation of the partner. The assignee is entitled to receive the assignor's profits, but the assignee does not replace the assigning partner in the partnership. The assigning partner's liability to third parties as a partner also is not affected by the assignment.
If no provisions are made in an agreement, a general partnership allocates profits and losses based on the A. Value of actual contributions made by each partner. B. Number of partners. C. Number of hours each partner worked in the partnership during the year. D. Number of years each partner belonged to the partnership.
B. Number of partners. Explanation: Under the Revised Uniform Partnership Act, the partnership agreement determines the allocation of partnership profits and losses among partners. Without an agreement, the RUPA allocates profits equally. Moreover, each partner must contribute toward losses in the same proportion (s)he is entitled to share in profits.
Jackie Daniels, Jess Beal, and Sid Wade agreed to form the DBW Partnership to engage in the import-export business. They had been life-long friends and had engaged in numerous business dealings with each other. It was orally agreed that Daniels would contribute $20,000, Beal $15,000 and Wade $5,000. It was also orally agreed that in the event the venture proved to be a financial disaster all losses above the amounts of capital contributed would be assumed by Daniels and that she would hold her fellow partners harmless from any additional amounts lost. The partnership was consummated with a handshake and the contribution of the agreed-upon capital by the partners. There were no other express agreements. Under these circumstances, which of the following is true? A. Profits are to be divided in accordance with the relative capital contributions of each partner. B. Profits are to be divided equally. C. The partnership is a nullity because the agreement is not contained in a signed writing. D. Profits are to be shared in accordance with the relative time each devotes to partnership business during the year.
B. Profits are to be divided equally. Explanation: Unless the partnership agreement states otherwise, profits and losses are shared equally. Also, unless agreed otherwise, losses are shared in the same proportion as profits. All partners are jointly and severally liable to firm creditors, and this liability cannot be changed by the partnership agreement. However, an indemnification agreement is valid among the partners.
The formation of a sole proprietorship A. Requires registration with the federal government's Small Business Administration. B. Requires a formal "doing business as" filing under state law if the proprietor plans to do business under a fictitious name. C. Requires formal registration in each state the proprietor plans to do business in. D. Is not as easy and inexpensive to form as an S corporation.
B. Requires a formal "doing business as" filing under state law if the proprietor plans to do business under a fictitious name. Explanation: A proprietor doing business under a fictitious name is usually required to make a d/b/a or "doing business as" filing under state law. Otherwise, the formation of a sole proprietorship is subject to few legal requirements, such as local zoning and licensing. In this respect, the sole proprietorship is the easiest and least expensive to create of all the business organizations.
Billie Donovan, a partner of Monroe, Lincoln, and Washington, is considering selling or pledging all or part of her interest in the partnership. The partnership agreement is silent on the matter. Donovan may A. Sell part but not all of her partnership interest. B. Sell or pledge her entire partnership interest without causing a dissolution. C. Pledge her partnership interest, but only with the consent of the other partners. D. Sell her entire partnership interest and confer partner status upon the purchaser.
B. Sell or pledge her entire partnership interest without causing a dissolution. Explanation: Under the RUPA, a transfer of a partner's transferable interest for security purposes (e.g., a pledge) causes neither dissociation of the partner nor dissolution of the partnership. Furthermore, a unanimous vote of the other partners is required to expel a partner because of a sale or other transfer (other than for security purposes) of all or substantially all of the partner's transferable interest. Expulsion on these grounds is a basis for dissociation of the partner, not dissolution of the partnership.
Rivers and Lee want to form a partnership. For the partnership agreement to be enforceable, it must be in writing if A. Rivers and Lee reside in different states. B. The agreement cannot be completed within 1 year from the date of its formation. C. Either Rivers or Lee is to contribute $500 or more in capital. D. The partnership intends to buy and sell real estate.
B. The agreement cannot be completed within 1 year from the date of its formation. Explanation: Most oral agreements to enter into a partnership are valid if the partnership agreement is for a period in excess of 1 year, however, the majority of states require that the partnership agreement be in writing to be enforceable. This is consistent with the "year clause" of the statute of frauds. If the statute of frauds is not complied with, a partnership at will results.
Three independent sole proprietors decided to pool their resources and form a partnership. The business assets and liabilities of each were transferred to the partnership. The partnership commenced business on September 1, but the parties did not execute a formal partnership agreement until October 15. Which of the following is true? A. The existing creditors must consent to the transfer of the individual business assets to the partnership. B. The partnership began its existence on September 1. C. If the partnership's duration is indefinite, the partnership agreement must be in writing and signed. D. In the absence of a partnership agreement specifically covering division of losses among the partners, they will be deemed to share them in accordance with their capital contributions.
B. The partnership began its existence on September 1. Explanation: A general partnership exists when two or more persons associate to carry on a business as co-owners for profit. No formalities need to be observed, and the partnership may exist even though the persons involved have not so intended. This partnership came into existence upon the commencement of carrying on a business, not the execution of a formal agreement.
The apparent authority of a partner to bind the partnership in dealing with third parties A. Will be effectively limited by a formal resolution of the partners of which third parties are unaware. B. Will be effectively limited by the filing of a statement of partnership authority. C. Would permit a partner to submit a claim against the partnership to arbitration. D. Must be derived from the express powers and purposes contained in the partnership agreement.
B. Will be effectively limited by the filing of a statement of partnership authority. Explanation: Each partner in a general partnership is an agent of the partnership. The partners may not limit partnership liability to third parties by agreement among the partners alone. But apparent authority is effectively limited to the extent a third party knows of limitations imposed on a partner's authority. The RUPA provides for filing of a statement of authority that may give notice of limitations on the authority of a partner.
When a party deals with a partner who lacks actual or apparent authority, a general partnership will be bound by the resulting contract if the other partners Ratify Amend the the Partnership Contract Agreement A. Yes Yes B. Yes No C. No Yes D. No No
B. Yes No Explanation: A general partnership is bound on a contract made by a partner acting within the scope of his or her actual authority (either express or implied) or by the apparent authority a third party reasonably believes an agent has. A partnership also may be liable on an unauthorized contract by ratification. Ratification is approval after the fact of an unauthorized act and binds the partnership as if the partner had been initially authorized. Ratification may be express or implied from conduct of the principal. However, amending the partnership agreement by itself does not imply ratification.
When parties intend to create a partnership that will be recognized under the Revised Uniform Partnership Act they must agree to I. Conduct a Business for Profit II. Share Gross Receipts from a Business A. Yes Yes B. Yes No C. No Yes D. No No
B. Yes No Explanation: A partnership is an association of two or more persons conducting a business, which they co-own, for profit. Thus, partners must objectively intend that their business make a profit, even if no profit is earned. Each of the parties must be a co-owner. They share profits and losses of the venture and management authority (unless they agree otherwise).
When the Revised Uniform Partnership Act applies and there is no general partnership agreement, which of the following events, if any, occur(s) when a partner dies? I. The Partner is Dissociated II. The Deceased Partner's Estate Is Free From Any Partnership Liability A. Yes Yes B. Yes No C. No Yes D. No No
B. Yes No Explanation: Under the RUPA, the death of a partner results in dissociation of the partner but not automatic dissolution of the partnership. Other events (e.g., incapacity, insolvency, or expulsion by a unanimous vote of the other partners or under the terms of the partnership agreement) also cause dissociation. However, the only form of dissociation that dissolves the partnership is dissociation by notice of an express will to withdraw. When a partner dies, the partnership interest becomes part of the deceased partner's estate. Moreover, the estate is responsible for the partner's allocated share of any partnership liabilities. These liabilities may include post-dissociation contracts entered into with third parties who reasonably believe that the dissociated person is still a partner.
A general partner will not be personally liable for which of the following acts or transactions? A. The gross negligence of one of the partnership's employees while carrying out the partnership business. B. A contract entered into by the majority of the other partners but to which the general partner objects. C. A personal mortgage loan obtained by one of the other partners on his or her residence to which that partner, without authority, signed the partnership name on the note. D. A contract entered into by the partnership in which the other partners agree among themselves to hold the general partner harmless.
C. A personal mortgage loan obtained by one of the other partners on his or her residence to which that partner, without authority, signed the partnership name on the note. Explanation: A general partner is not personally liable if another partner signs the partnership name to a note securing a mortgage on his or her personal residence. Such an act is not apparently for carrying on in the ordinary course the partnership business or business of the kind carried on by the partnership. This act binds the partnership only if authorized by the other partners. Reasonable third parties should realize that the partner lacked the apparent authority to bind the partnership for personal benefit and therefore should require proof of express authority.
Which of the following statements is true regarding the division of profits in a general partnership when the written partnership agreement only provides that losses be divided equally among the partners? Profits are to be divided A. Based on the partners' ratio of contribution to the partnership. B. Based on the partners' participation in day-to-day management. C. Equally among the partners. D. Proportionately among the partners.
C. Equally among the partners. Explanation: The partnership agreement, to the extent it allocates partnership profits and losses among partners, governs. Without an agreement, each partner is entitled to an equal share of profits and must contribute toward losses in the same proportion (s)he is entitled to share in profits.
Which of the following statements is true regarding sole proprietorships? A. Equity capital from outside sources can be easily raised. B. The proprietor has authority to make management decisions in accordance with rules set by the Small Business Administration. C. A sole proprietorship located and registered in Florida also may operate in Nevada and Michigan without having to register formally in those states. D. An advantage of the sole proprietorship is its continuation after the proprietor dies.
C. A sole proprietorship located and registered in Florida also may operate in Nevada and Michigan without having to register formally in those states. Explanation: An advantage of the sole proprietorship is its ability to do business in any state without having to file, register, or otherwise qualify to do business in that state.
B approached L and proposed they form a partnership to exploit a profitable idea of B's. L declined citing the risk of unlimited liability. B then proposed that L lend B $50,000 and that B go into the business as a sole proprietor. L would receive half the profits and the right to veto any of B's decisions. The debt would have a long-term maturity date to facilitate operation of the business during its development stage. If L accepts the above proposition, the likely result is that A. A debtor-creditor relationship exists between B and L. B. B and L are not partners as to each other, or third parties. C. B and L have formed a partnership even if they did not intend to. D. If L promises orally to become a partner of B and to transfer real property to the business, the statute of frauds would prohibit enforcement of the promise.
C. B and L have formed a partnership even if they did not intend to. Explanation: A partnership can be formed without actual intent if an association of two or more persons exists to carry on a business as co-owners for profit. In addition to sharing in profits, L funded the venture and has the right to participate in management. Thus, B and L's arrangement constitutes co-ownership, and a partnership was formed.
Under the Revised Uniform Partnership Act (RUPA), which of the following statements concerning the powers and duties of partners in a general partnership is(are) true? I. Each partner is an agent of every other partner and acts as both a principal and an agent in any business transaction within the scope of the partnership agreement. II. Each partner is subject to joint and several liability on partnership debts and contracts. A. I only. B. II only. C. Both I and II. D. Neither I nor II.,
C. Both I and II. Explanation: Under the RUPA, a general partnership is primarily an agency relationship. Each partner is an agent of every other partner and acts as both a principal and an agent in any business transaction within the actual or apparent scope of the partnership. Application of this principle of agency law results in joint and several liability of the partners for the partnership's debts and contracts. The RUPA provides that all partners are jointly and severally liable for all obligations of the partnership unless agreed otherwise by the claimant or provided by state law.
Which of the following statements is true concerning liability when a partner in a general partnership commits a tort while engaged in partnership business? A. The partner committing the tort is the only party liable. B. The partnership is the only party liable. C. Each partner is jointly and severally liable. D. Each partner is liable to pay an equal share of any judgment.
C. Each partner is jointly and severally liable. Explanation: Partners are jointly and severally liable for the torts committed by another partner who acted within the ordinary course of the partnership business or with the authorization of the other partners. Joint and several liability means that all of the partners are liable, but a third party may hold any partner liable for the entire amount. Under the RUPA, joint and several liability is also imposed for all partnership obligations, not merely those arising from torts.
James Fine is doing business as Fine's Apparels, a sole proprietorship. In the past year Fine had regularly joined with Charles Walters in the marketing of bathing suits and beach accessories. Which of the following factors is the most important in ascertaining whether Fine and Walters have created a partnership relationship? A. A partnership agreement is not in existence. B. Each has a separate business of his own that he operates independently. C. Fine and Walters divide the net profits equally on a quarterly basis. D. Fine and Walters did not intend to be partners.
C. Fine and Walters divide the net profits equally on a quarterly basis. Explanation: The co-owners must intend that the business make a profit. Thus, the RUPA presumes that a person who receives a share of the profits of a business is a co-owner and therefore a partner in the business. However, this presumption does not exist if the profits are received (1) in payment of a debt, (2) as wages or rent, (3) as interest on a loan, (4) as payment for sale, or (5) as an annuity or other retirement or health benefit to a deceased partner's representative.
Major Supply, Inc., is seeking a judgment against Les Danforth on the basis of a representation made by Dirk Coleman, in Danforth's presence, that they were in partnership together doing business as the D & C Trading Partnership. Major Supply received an order from Coleman on behalf of D & C and shipped $800 worth of goods to Coleman. Coleman has defaulted on payment of the bill and is insolvent. Danforth denies he is Coleman's partner and that he has any liability for the goods. Insofar as Danforth's liability is concerned, which of the following is true? A. Danforth is not liable if he is not in fact Coleman's partner. B. Because Danforth did not make the statement about being Coleman's partner, he is not liable. C. If Major Supply gave credit in reliance upon the misrepresentation by Coleman, Danforth is a partner by estoppel. D. Because the "partnership" is operating under a fictitious name (the D & C Trading Partnership), a filing is required and Major Supply's failure to ascertain whether there was in fact such a partnership precludes it from recovering.
C. If Major Supply gave credit in reliance upon the misrepresentation by Coleman, Danforth is a partner by estoppel. Explanation: A partnership by estoppel may be recognized when an actual partnership does not exist. The duties and liabilities of a partner may be imposed on a nonpartner (a purported partner) who has represented himself or herself as a partner. Moreover, the purported partner is deemed to be an agent of persons who have consented to such a representation. A third party who has reasonably relied on the representation and suffered harm as a result may assert the existence of a partnership. The purported partner and the persons consenting then are prevented (estopped) from denying the existence of a partnership. Thus, even though Danforth and Coleman are not in fact partners, if Major relied on the statement by Coleman made in Danforth's presence and not objected to by Danforth, Danforth is estopped from asserting that no partnership existed. The result is a partnership by estoppel and Danforth is liable to Major.
Under the Revised Uniform Partnership Act, which of the following have the right to inspect partnership books and records? A. Employees. B. Former partners. C. Inactive partners. D. Transferees of partners' interests.
C. Inactive partners. Explanation: The RUPA states that the partnership must provide a partner with information "reasonably required for the proper exercise of the partner's right and duties," including access to the partnership books and records. No distinction is made between active and inactive partners.
Which of the following statements is true regarding the apparent authority of a partner to bind the partnership in dealings with third parties? Under the RUPA, the apparent authority A. Must be derived from the express powers and purposes contained in the partnership agreement. B. Will be effectively limited by a formal resolution of the partners of which third parties are unaware. C. May allow a partner to bind the partnership to representations made in connection with the sale of goods. D. Would permit a partner to submit a claim against the partnership to arbitration.
C. May allow a partner to bind the partnership to representations made in connection with the sale of goods. Explanation: The RUPA provides that the act of a partner for the apparent purpose of carrying on the partnership business or business of the kind carried on by the partnership binds the partnership unless the person with whom (s)he is dealing knows the acting partner lacks actual authority, for example, because of the partnership's filing of a statement of authority. Courts interpret this language as establishing the apparent authority of partners to take actions that are usual for partnerships. These actions include buying and selling goods and making representations in connection with the sale. The apparent authority of a general partner is substantial.
The partners of College Assoc., a general partnership, decided to dissolve the partnership and agreed that none of the partners would continue to use the partnership name. Which of the following events will occur on dissolution of the partnership? I. Each Partner's Existing Liability Would Be Discharged II. Each Partner's Apparent Authority Would Continue A. Yes Yes B. Yes No C. No Yes D. No No
C. No Yes Explanation: Dissolution can occur by an agreement of the partners to end the partnership. Although actual authority to act on behalf of the partnership ceases at dissolution, apparent authority to conduct business in the usual way continues until notice is given to third parties or the partnership business winds up. A partner's liability for the existing obligations of the partnership does not cease when the partnership is terminated. The unilateral act of the partners cannot discharge obligations to third parties.
Unless the partnership agreement prohibits it, a partner in a general partnership may validly assign rights to Partnership Partnership Property Distributions A. Yes Yes B. Yes No C. No Yes D. No No
C. No Yes Explanation: Partnership property is owned by the partnership and not by the individual partners. A partner has no interest in partnership property, which can be assigned or otherwise transferred. A partner may assign his or her interest in the partnership but is not allowed to assign rights in specific partnership property. However, unless the partnership agreement prohibits it, a partner in a general partnership may validly assign rights to his or her share of partnership distributions.
Fact Pattern: Ted Fein, a partner in the ABC Partnership, wishes to withdraw from the partnership and sell his interest to Ian Gold. All of the other partners in ABC have agreed to admit Gold as a partner and to hold Fein harmless for the past, present, and future liabilities of ABC. A provision in the original partnership agreement states that the partnership will continue upon the death or withdrawal of one or more of the partners. The agreement to hold Fein harmless for all past, present, and future liabilities of ABC will A. Prevent partnership creditors from holding Fein personally liable only as to those liabilities of ABC existing at the time of Fein's withdrawal. B. Prevent partnership creditors from holding Fein personally liable for the past, present, and future liabilities of ABC. C. Not affect the rights of partnership creditors to hold Fein personally liable for those liabilities of ABC existing at the time of his withdrawal. D. Permit Fein to recover from the other partners only amounts he has paid in excess of his proportionate share.
C. Not affect the rights of partnership creditors to hold Fein personally liable for those liabilities of ABC existing at the time of his withdrawal. Explanation: The agreement of the other partners to release Fein from liability merely limits his personal liability to those partners. They cannot relieve him from liability to third parties, such as partnership creditors, for those liabilities existing at the time of Fein's withdrawal.
X, Y, and Z have capital balances of $30,000, $15,000, and $5,000, respectively, in the XYZ Partnership. The general partnership agreement is silent as to the manner in which partnership losses are to be allocated but does provide that partnership profits are to be allocated as follows: 40% to X, 25% to Y, and 35% to Z. The partners have decided to dissolve and liquidate the partnership. After paying all creditors, the amount available for distribution will be $20,000. X, Y, and Z are individually solvent. Z will A. Receive $7,000. B. Receive $12,000. C. Personally have to contribute an additional $5,500. D. Personally have to contribute an additional $5,000.
C. Personally have to contribute an additional $5,500. Explanation: Upon termination, a partnership must first pay all creditors, including partners who are creditors, and then distribute the remaining assets to the partners. In this case, $20,000 is available for distribution. However, the total of capital contributions is $50,000, and a $30,000 ($50,000 capital contributions - $20,000 available for distribution) loss must be allocated among the partners. When the partnership agreement does not specify otherwise, losses are allocated in the same ratio as profits. Thus, Z is properly allocated 35% of the loss, or $10,500 ($30,000 × 35%). Z's capital contribution of $5,000 is less than Z's share of the loss. Thus, Z must contribute an additional $5,500 to the partnership.
The partnership of Joe Baker, Art Green, and Guy Madison is insolvent. The partnership's liabilities exceed its assets by $123,000. The liabilities include a $25,000 loan from Madison. Green is personally insolvent. His personal liabilities exceed his personal assets by $13,500. Green has filed a voluntary petition in bankruptcy. Under these circumstances, partnership creditors A. Must proceed against the partnership and all the general partners in one lawsuit so that losses may be shared equitably among the partners. B. Rank first in payment and all (including Madison) will share proportionately in the partnership assets to be distributed. C. Will have the first claim to partnership property to the exclusion of the personal creditors of Green. D. Do not have the right to share pro rata with Green's personal creditors in Green's personal assets.
C. Will have the first claim to partnership property to the exclusion of the personal creditors of Green. Explanation: The creditors of the partnership have first priority in the distribution of the assets of the partnership. The personal creditors of Green can reach Green's transferable interest (not specific partnership assets) only through a charging order.
The partnership agreement for Owen Associates, a general partnership, provided that profits be paid to the partners in the ratio of their financial contribution to the partnership. Moore contributed $10,000, Noon contributed $30,000, and Kale contributed $50,000. For the year ended December 31, Owen had losses of $180,000. What amount of the losses should be allocated to Kale? A. $20,000 B. $60,000 C. $90,000 D. $100,000
D. $100,000 Explanation: he partnership agreement specifies that profits are to be allocated based on financial contributions. The RUPA provides that, unless otherwise agreed, losses are allocated in the same manner as profits. Thus, Kale will be allocated losses of $100,000 {$180,000 × [$50,000 ÷ ($10,000 + $30,000 + $50,000)]}.
What term is used to describe a partnership without a specified duration? A. A perpetual partnership. B. A partnership by estoppel. C. An indefinite partnership. D. A partnership at will.
D. A partnership at will. Explanation: A partnership at will is one "in which the partners have not agreed to remain partners until the expiration of a definite term or the completion of a particular undertaking" (RUPA).
Eller, Fort, and Owens do business as Venture Associates, a general partnership. Trent Corp. brought a breach of contract suit against Venture and Eller individually. Trent won the suit and filed a judgment against both Venture and Eller. Venture then entered bankruptcy. Under the RUPA, Trent will generally be able to collect the judgment in full from A. Partnership assets but not partner personal assets. B. The personal assets of Eller, Fort, and Owens. C. Eller's personal assets only after partnership assets are exhausted. D. Eller's personal assets.
D. Eller's personal assets. Explanation: The RUPA provides that partners are jointly and severally liable for all obligations of the partnership, including those arising out of a contract. The keys to the question are that (1) Trent sued both the partnership and one partner, (2) that partner can be held individually liable for the entire amount of a partnership obligation (joint and several liability), and (3) only parties who are judgment debtors can be held liable. Because Trent won the lawsuit against Venture and Eller, either Venture or Eller or both are liable for the judgment amount. In this scenario, the partnership is in bankruptcy. A plaintiff with a judgment against a defendant in bankruptcy typically collects very little, if any, of the judgment. The judgment against the partnership will be subordinated to the claims of secured creditors and creditors with priority. As a result, Trent will likely seek to recover the full judgment from Eller's personal assets, given that Eller was a co-defendant in the lawsuit. Furthermore, because Venture is in bankruptcy, the RUPA provides that Trent need not seek a writ of execution against (compel collection of the judgment amount from) Venture before proceeding against Eller's personal assets.
Generally, under the Revised Uniform Partnership Act, a partnership has which of the following characteristics? I. Unlimited Duration II. Obligation for Payment of Federal Income Tax A. Yes Yes B. Yes No C. No Yes D. No No
D. No No Explanation: A partnership is an association of two or more persons to carry on a business as co-owners for profit. For federal income tax purposes, it is a flow-through entity. Thus, partnership income (loss) is reported on the owners' tax returns, but the partnership itself does not pay taxes. Moreover, one of the distinguishing characteristics of the partnership form of business is its lack of continuity of life.
Many states require partnerships to file the partnership name under laws known as fictitious name statutes. These statutes A. Require a proper filing as a condition precedent to the valid creation of a partnership. B. Are designed primarily to provide registration for tax purposes. C. Are designed to clarify the rights and duties of the members of the partnership. D. Have little effect on the creation or operation of a partnership other than the imposition of a fine or other minor penalty for noncompliance.
D. Have little effect on the creation or operation of a partnership other than the imposition of a fine or other minor penalty for noncompliance. Explanation: Fictitious name statutes have been enacted in most states for the protection of creditors. Registration permits creditors to discover the persons liable for the debts of the enterprise. The creation and operation of a partnership is little affected by the requirement because a partnership need not adopt a name, although use of a name may help to distinguish a partnership action from that of a partner. Moreover, the use of a name does not necessarily indicate the existence of a partnership or that a named person is a member of the firm.
General partners have a fiduciary relationship with each other. Accordingly, a general partner A. May engage in a business that competes with the partnership if it is operated with his or her own resources. B. May take advantage of a business opportunity within the scope of the partnership enterprise if the partnership agreement will terminate before the benefit will be received. C. Must exercise a degree of care and skill as a professional. D. May not earn a secret profit in dealings with the partnership or partners.
D. May not earn a secret profit in dealings with the partnership or partners. Explanation: A general partner is an agent of the partnership and the other partners and thus owes fiduciary duties of loyalty and due care. A partner also has an obligation of good faith and fair dealing. In dealings with the partnership or other partners, a partner may not earn a secret profit. (S)he must account to the partnership and hold as trustee for it any benefit derived in the conduct or winding up of the partnership business or from use of partnership property (including appropriation of a partnership opportunity).
James Quick was a partner in the Fast, Sure, and Quick Factors partnership. He subsequently died. His will left everything to his wife including a one-third interest in the land and building owned by Fast, Sure, and Quick. Which of the following statements is true? A. Mrs. Quick is a one-third owner of Fast, Sure, and Quick's land and building. B. The real property in question was held by the partnership as a tenancy in common. C. Mrs. Quick automatically becomes the partner of Fast and Sure upon her husband's death. D. Mrs. Quick has the right to receive a settlement for her husband's interest in the partnership.
D. Mrs. Quick has the right to receive a settlement for her husband's interest in the partnership. Explanation: Under the RUPA, a partnership interest consists of a share in profits and losses and the right to receive distributions. A partner's death is an event causing dissociation of the partner but not dissolution of the partnership. If the business is not wound up, the partnership must purchase the dissociated partner's interest for a price based on a hypothetical sale of the partnership at the dissociation date. Thus, the decedent's estate (or beneficiaries, presumably including a surviving spouse) is entitled to the value of the decedent's partnership interest but not to any specific partnership property.
A partner's interest in specific partnership property is I. Assignable to the Partners' Individual Creditors II. Subject to Attachment by the Partner's Individual Creditors A. Yes Yes B. Yes No C. No Yes D. No No
D. No No Explanation: A partner may assign his or her interest in the partnership but is not allowed to assign rights in specific partnership property. A partner's individual creditors may not attach partnership property but may charge a partner's interest in the partnership. Only a claim against the entire partnership allows specific partnership property to be attached.
Under the RUPA, unless otherwise provided in a general partnership agreement, which of the following statements is true when a partner dies? I. The Deceased Partner's Executor Would Automatically Become A Partner II. The Deceased Partner's Estate Would Be Free From Any Partnership Liabilities III. The Partnership Would Be Dissolved Automatically A. Yes Yes Yes B. Yes No No C. No Yes No D. No No No
D. No No No Explanation: Under the RUPA, the death of a partner results in dissociation, not automatic dissolution. In many instances, dissociation results in a buyout of the dissociated partner's interest and a continuation of the partnership rather than a winding up. The partnership interest becomes part of the deceased partner's estate. However, neither the executor nor the successor to the partnership interest automatically becomes a partner unless the other partners agree. The estate is responsible for the partner's allocated share of any partnership liabilities.
Berry, Drake, and Flanigan are partners in a general partnership. The partners made capital contributions as follows: Berry, $150,000; Drake, $100,000; and Flanigan, $50,000. Drake made a loan of $50,000 to the partnership. The partnership agreement specifies that Flanigan will receive a 50% share of profits and that Drake and Berry each will receive a 25% share of profits. Under the Revised Uniform Partnership Act and in the absence of any partnership agreement to the contrary, which of the following statements is correct regarding the sharing of losses? A. The partners will share equally in any partnership losses. B. The partners will share in losses on a pro rata basis according to the capital contributions. C. The partners will share in losses on a pro rata basis according to the capital contributions and loans made to the partnership. D. The partners will share in losses according to the allocation of profits specified in the partnership agreement.
D. The partners will share in losses according to the allocation of profits specified in the partnership agreement. Explanation: Unless the partners agree otherwise, the RUPA provides for equal sharing of the partnership's profits. Also, unless otherwise agreed, each partner must contribute in proportion to his or her share of the profits toward any losses of the partnership. Thus, Flanigan, Drake, and Berry are responsible for 50%, 25%, and 25%, respectively, of the partnership's losses.
Locke and Vorst were general partners in a kitchen equipment business. On behalf of the partnership, Locke contracted to purchase 15 stoves from Gage. Unknown to Gage, Locke was not authorized by the partnership agreement to make such contracts. Vorst refused to allow the partnership to accept delivery of the stoves, and Gage sought to enforce the contract. Gage will A. Lose, because Locke's action was not authorized by the partnership agreement. B. Lose, because Locke was not an agent of the partnership. C. Win, because Locke had express authority to bind the partnership. D. Win, because Locke had apparent authority to bind the partnership.
D. Win, because Locke had apparent authority to bind the partnership. Explanation: A general partner is an agent of the partnership. Agents may have express, implied, and apparent authority. Apparent authority is authority that a reasonable third person believes the agent to have. Contracting for delivery of stoves is within the scope of ordinary business of a partnership in a kitchen equipment business. It is therefore within the scope of a general partner's apparent authority. Limitations imposed on an agent by the principal are ineffective as to third persons who have relied on the agent's apparent authority. But the principal may file a statement of authority that gives constructive notice of any limitations on the authority of a partner.
