Chapter 10 Quiz BUL3310
May is one of three limited partners in a limited partnership. Each limited partner made a capital contribution of $50,000. Assume there is a judgment against the partnership for $300,000 and that both the partnership and the general partner are insolvent. What is the maximum amount that May will have to pay on the judgment?
$50,000: May's capital contribution can be applied to the debt, but she is not personally liable beyond that.
Subchapter S corporations are limited to _________shareholders.
100
The maximum number of shareholders a Subchapter S corporation may have is
100
John was a limited partner in Commercial Properties Limited. When the general partner became ill, John took over all the management duties of Commercial Properties. Ace Office Equipment, a supplier of Commercial Properties, is suing Commercial Properties over several months of unpaid bills. Under modern laws governing the operation of limited partnerships, which of the following statements best describes John's personal liability for Commercial's debt to Ace Office Equipment?
Ace can hold John personally liable for Commercial's debt only if Ace knew that John had taken over the management duties.
Which of the following decisions would require a unanimous vote of the partners?
Admitting a new partner into the partnership
Subchapter S corporation will avoid double taxation only if which of the following applies?
All the shareholders agree to be taxed as in a partnership.
Which of the following best describes the "double taxation" on corporate profits?
Corporations pay taxes on the profits they distribute to the shareholders as dividends, and shareholders pay taxes on the same dividends as personal income.
In a limited partnership, the _________partner has unlimited personal liability for the debts of the partnership; the ____________partner is liable only to the extent of his or her capital contribution.
General----------------limited
A person who becomes a partner by estoppel
Has no partnership rights, only liability to creditors who believed he was a partner
Which of the following issues do not require a unanimous vote of the partners?
Hiring an office manager for 40 hours a week.
If a partnership agreement does not say how losses will be shared, they will be shared
In whatever way the profits are shared
Jim and Fred had been equal partners in J & F Industries for 20 years. Jim has died and Fred is now in the process of winding up the partnership. Which of the following statements about the winding up process is false?
Jim's estate is entitled to participate in the winding up process.
Megan has joined Alliance Partners, making a 50,000 capital contribution. Alliance has been in business for 10 years and Megan is worried about her liability for pre-existing debts. Which statement best describes her liability for the debts Alliance had when she joined the partnership?
Megan has no personal liability for the debts, but her entire capital contribution may be used to satisfy them.
Peter, Paul and John, who were licensed pharmacists, formed a partnership to purchase and run a small drugstore chain. Each held a 13 interest in the partnership. When Paul died his wife Ellen began receiving annuity payments equal to 13 of the partnership's net profits. The payments were to last for 3 years. Ellen is also a licensed pharmacist and perfectly capable of performing all the duties that Peter, Paul and John performed. She claims that under partnership law both her right to receive a share of net profits and her expertise in the field are prima facie evidence that she is a partner in the firm. Is Ellen correct?
No, paying a surviving spouse an annuity out of net profits is not prima facie evidence of partnership.
Allfam is a closely held family corporation, many of whose shareholders are employees of the corporation. In an attempt to reduce its taxes, Allfam paid its shareholder-employees enormous salaries and deducted the salaries as a corporate expense. Is Allfam permitted to do this?
No, the IRS will disallow the deductions for unreasonably high salaries and tax them as dividends.
Jim and Sid are partners in Widget Manufacturing. Jim read a letter from one of Widget's buyers asking for adequate assurances that Widget would be able to meet an upcoming contractual obligation. The demand was proper and, under Article 2, the buyer could treat the contract as breached if Widget did not respond to the demand within 3 months. Jim forgot to tell Sid about the demand and did not respond to it himself. Widget is now being sued by Buyer for 4,000 in damages for breach of contract. Sid contends that the partnership is not liable because only one partner was aware of the demand. Is Sid correct?
No, the partnership is liable because notice to one partner is legally notice to all the partners and the partnership.
Corporations are said to have a burden of "double tax" because
Profits are taxed at the corporate level as income and again at the shareholder level as dividends.
Which of the following statements about the taxation of corporations is false?
Profits retained by the corporation are normally taxable to the shareholders under the corporate pass through rule.
A partner who does not participate in the management of the business is a _________partner; a partner who participates in decisions and advises management, but whose partnership interest is not known to third parties is a _________________partner.
Silent----------------------Secret
Which of the following statements about proprietorships is true?
The owner of a proprietorship is personally liable for all the debts of the proprietorship.
Bob, Sue and Jim were classmates in medical school who formed a professional corporation to practice medicine. Which of the following statements about their professional corporation is false?
They will be protected from suits for medical malpractice.
A partnership that buys and sells commodities is a _______________partnership; a partnership that produces goods or sells services is a _____________partnership.
Trading-----------------------non-trading
Bob and Sue, who are both attorneys, agreed to share office space and other overhead expenses in order to save money. They did not agree to form a partnership. They do not share profits or losses and neither has a say in the management of the other's business. The sign outside their door, and on their common letterhead, reads: "Bob Smith and Sue Jones, Attorneys at Law." Using this stationary, Bob purchased office equipment from Smart Buy. Sue at no time used the equipment and did not enter into the contract with Smart Buy. Bob did not pay for the equipment and Smart Buy wants to hold Sue liable. Is Sue liable as a partner for this purchase?
Yes, allowing her name to be used with Bob's in the same letterhead created a partnership by estoppel
A partnership will not terminate by operation of law if
a partner becomes insolvent
Jay, who is a partner in an accounting firm, is being sued for malpractice by a client. If the jury finds for the client, which of the following parties will have liability on the judgment?
all of the above have liability on the judgment
The formal document that represents the agreement of the parties to form a partnership is the ___________.
articles of partnership
The written agreement between two or more persons that creates a partnership and sets for the rights and duties of each partner is the_____________.
articles of partnership
Which of the following is not required to create a partnership?
business experience
The agreement among the partners that spells out how the firm's assets will be valued and how the interests of a retiring or deceased partner will be bought out is a(n) ___________________ agreement.
buy and sell
John, a partner in KLM Partners, had a personal loan from First Bank for 35,000. First Bank got a judgment against John after he defaulted on the loan. First Bank can reach John's interest in KLM Partners and require that a receiver be appointed to take John's share of the partnership profits to satisfy the judgment. The court order that will do this is an ________________
charging order
Any change in the identity of the partners, whether through death, withdrawal, or the adding of a new partner, results in the ________________of the old partnership.
dissolution
Frank is in the business of selling imported pottery. To induce a new wholesaler to sell him goods on credit, Frank and his brother Ed told the wholesaler that Ed was a partner in the business. In fact, Ed had no partnership interest and Frank was a sole proprietor. Ed now has liability to the wholesaler based on
estoppel
A doctor who practices as part of a professional association cannot be sued for malpractice.
false
A joint venture cannot sue or be sued.
false
A partnership is a taxable entity.
false
Absent an agreement otherwise, each partner is entitled to compensation for his or her services in managing the business.
false
An incoming partner has unlimited personal liability for the already existing debts of the partnership.
false
Debbie, the manager of a large furniture store, receives a bonus each year equal to 2% of the business' net profits. Under RUPA, this is conclusive evidence that Debbie has a partnership interest in the business.
false
If a partner assigns his or her interest in a partnership to a creditor, the assignee steps into the shoes of the partner and becomes entitled to participate in the management of the business.
false
In a closely held corporation, the shareholders will be personally liable for torts committed by employees of the corporation if committed while carrying out their employee duties.
false
In a partnership for a term of years, each partner has both the power and the right to withdraw from the partnership at any time.
false
Marshaling of assets is the tax doctrine that allows income to be taxed only at the owner level and not at the organization level.
false
Partnerships are required to use the term "Company" in their names.
false
The owner of a limited liability company LLC has unlimited personal liability for the debts of the LLC.
false
The partnership must pay interest each year on the capital contributions of the partners.
false
Vic and Thom bought an antique Corvette at auction with the intent of restoring it and selling it for a profit, which they will share equally. Vic and Thom have formed a professional association.
false
In a limited partnership LP, what are the partners who have unlimited personal liability for the debts of the LP?
general partners
Which business entity is defined as "an association of two or more owners who carry on as co-owners a business for profit?"
general partnership
Which of the following is an informal association of two or more persons who agree to engage as co-owners in a single business transaction?
joint venture
A partnership whose primary purpose is to manufacture things or to provide services is a ____________partnership.
non-trading
By statute, a limited partnership must have a minimum of ____________limited partners.
one
When partners enter into a partnership without stating how long the partnership will last, they have formed an ____________________.
partnership at will
What is the provision of the tax rule that makes income taxable only for the individuals who receive it, and not for the business entity that produces it?
pass through
A partnership need not give public notice of its dissolution if the dissolution was caused by
the bankruptcy of a partner
A partnership whose primary business purpose is the buying and selling of goods is a ________partnership.
trading
A Subchapter S corporation is taxed in the same way a partnership is taxed.
true
A buy and sell agreement normally specifies the terms under which a withdrawing or deceased partner's interest will be bought out.
true
A corporation must qualify to do business in each state where it conducts business activities.
true
A dormant partner is one who does not participate in the management of the business and whose identity is not known to third parties.
true
A limited partnership must have at least one general partner and one limited partner.
true
A partnership maybe created by an express agreement between the parties or it may be implied from their conduct.
true
A person may become a partner without making a capital contribution.
true
A sole proprietorship is not a taxable entity; all profits or losses are reported and taxed as individual income.
true
Absent a contrary provision in the partnership agreement, all partners have equal rights in the management of the business.
true
An advantage to doing business as a corporation is that ownership interests can be transferred without impact on day-to-day business operations.
true
If net profits are retained in a Subchapter S corporation, income tax must be paid by shareholders on these earnings even though the earnings have not yet been received.
true
If the partnership agreement does not state how long the partnership is to last, a partnership- at- will is created.
true
In a Limited Liability Company, the losses and profits pass through to the shareholders.
true
Investors favor using Limited Partnerships to invest in commercial real estate because they can use the depreciation of the property as a tax loss.
true
Legal capacity is the ability of an organization to sue and to own property.
true
Members of professional associations and professional corporations are eligible under the Tax Code to participate in pension and profit-sharing plans.
true
One partner has the ability to veto the admission of a new partner into the business.
true
Partner A defrauded a client of the partnership. Partners B and C are jointly and severally liable with A to the client, even though they were unaware of the fraud.
true
Partners have unlimited personal liability for the debts incurred by the partnership.
true
Partnerships typically buy life insurance policies on each partner in order to fund the required purchase of the partner's interest in the partnership when the partner dies.
true
Premiums paid by corporations for the health insurance it provides employees are tax-deductible expenses.
true
Shareholders of a corporation may also be employees of that corporation.
true
Shareholders of corporations pay taxes on the dividends distributed to them by the corporation.
true
Subchapter S corporations may have a maximum of 100 shareholders.
true
The Tax Code does not allow corporations to deduct as expenses excessive or unreasonable compensation to officers and employees.
true
The admission of a new partner automatically dissolves the partnership.
true
The capital contribution of each partner is a liability to the partnership and must be returned to the partner when the partnership ends.
true
The surviving partner is entitled to compensation for winding up the affairs of the partnership.
true
Under RUPA, a partnership may take title to real property as a tenancy in partnership.
true
Unless agreed to otherwise, all partners have an equal vote in the management decisions of the partnerships.
true
Usury laws do not apply to corporations when they borrow money.
true
When a partnership ceases to exist, the process of reducing the firm's assets to cash, paying off the creditors, returning the capital contributions of the partners, and distributing profits is called __________________.
winding up