Chapter 30: Creation and Operation of a Partnership
Nick, Harry, and Joe were partners in a shoe manufacturing company. They supplied their shoes to a large number of wholesalers and retailers. "Tap Dance," a shoe retailer in Boston was one of their biggest clients. The owner of Tap Dance, who was happy with the quality of the products, gave Nick a check for $10,000 as a token of appreciation. Which of the following is true? a. The $10,000 should be considered profit of the firm. b. Since he was the contact for the client, Nick is entitled to keep the $10,000. c. The $10,000 should be deducted from the client's next bill. d. The $10,000 should be distributed equally among the company's shareholders.
a. The $10,000 should be considered profit of the firm. Any personal profits earned directly as a result of one's connection with the partnership must be considered profits of the firm. If the personal interest or advantage of a partner conflicts with the advantage of the partnership, the partner has a duty to put the firm's interest above personal advantage. Review the section "Exercise Loyalty and Good Faith" in Chapter 30.
Tonette and Margaret operated a craft store as a partnership. They had each invested $50,000 in the business and shared profits equally. Tonette had difficulty obtaining some supplies when there was a shortage of cotton. Although she knew the cotton was stolen, she bought some to resupply the store. Her purchase of stolen goods was discovered. She was charged with a crime and ordered to pay a $10,000 fine. What impact, if any, will this have on the partnership? a. As the partner of Tonette, Margaret will be personally liable for payment. b. Only Tonette will be liable for payment of the fine. c. The partnership will automatically be dissolved for criminal activity. d. The partnership will be liable for payment of the fine.
d. The partnership will be liable for payment of the fine. .A partnership has liability for any penalty incurred by the act of a partner in the ordinary course of business—while the partner acts as a partner in the business and in the promotion of partnership interests. The partnership has liability to the same extent as the acting partner. Thus the criminal acts of one partner can justify a find levied on partnership assets. Review the section "Liability of Partners" in Chapter 30.
What kind of business organization are Caleb and Anna operating under now? A sole proprietorship. A general partnership. A limited partnership. A corporation.
A general partnership. To be set up as a corporation or a limited partnership, Caleb and Anna would have had to register their business with the secretary of state of their state. Since it appears that they did not do that, but they are acting as one entity, the courts would probably hold them to be a partnership.
Suppose the agreement that was written does not say anything about how the partnership was to be run, how would the courts determine how the business is controlled? Each partner would have equal votes as to the operation of the partnership. Voting would be apportioned to the amount of capitol each had invested. Voting would be apportioned to the amount of time that each has spent running the partnership. Control would be solely in the hands of the partner the court determined was the "principal partner.
Each partner would have equal votes as to the operation of the partnership. Under the Uniform Partnership Act, when the partnership agreement is silent as to how the partnership is controlled, it is assumed that each partner will have equal say in the operation of the business.
Rodrigo and Pete operated a tire business as a partnership but did not have a written partnership agreement. They bought tires from manufacturers and installed them on cars and trucks. Pete was very knowledgeable about tires and vehicles so he ran the shop while Rodrigo was an accountant with an MBA, so he managed the business' books and paperwork. Rodrigo became dissatisfied with the profitability of the business so he told Pete he was going to run the shop with him. Which of the following is true? a. Pete will have to allow Rodrigo to participate in managing the shop. b. The disagreement will dissolve the partnership. c. Since Pete is more knowledgeable about tires and vehicles Rodrigo has no right to involvement in running the shop. d. Since Rodrigo has an MBA Pete has to allow Rodrigo to run the shop by himself.
a. Pete will have to allow Rodrigo to participate in managing the shop. In the absence of a contract limiting these rights, each partner has the right by law to participate equally with the others in the management of the partnership business. The right of each partner to a voice in management does not mean a dominant voice. Review the section "Participate in Management" in Chapter 30.
Mike started an architectural firm in partnership with Rebecca. They made a written agreement which mentioned Mike's and Rebecca's names as partners and the place of establishment of the business as Miami, Florida. It is also mentioned that each of them was eligible for an equal share in the profits made by the company and this agreement was authorized by both of them. This written agreement is called the: a. articles of partnership. b. abstracts of partnership. c. reference of partnership. d. memorandum of partnership
a. articles of partnership. Partners ordinarily do not need to have a written agreement, but if they do, the agreement between them is called the articles of partnership. Articles of partnership vary according to the needs of the particular situation. Review the subsection "Written Agreement" in the section "Partnership Agreements" in Chapter 30.
Kelly and Nina together started a beauty salon in Atlanta, Georgia. Kelly made an initial investment of $100,000 while Nina made an initial investment of $50,000 in the beauty salon. Kelly later wanted to withdraw $50,000 of her investment for a personal emergency. Which of the following is true? a. Kelly's withdrawal of part of her initial investment dissolves the partnership. b. Kelly may withdraw part of her original investment with Nina's consent. c. Kelly may withdraw her original investment only by agreeing to forego her future share of profits. d. Kelly's withdrawal of part of her initial investment makes Nina the sole manager of the business.
b. Kelly may withdraw part of her original investment with Nina's consent. A partner has no right to withdraw any part of the original investment without the consent of the other partners. One partner, however, who makes additional advances in the form of a loan, has a right to withdraw this loan at any time after the due date. Review the section "Withdraw Advances" in Chapter 30.
The basis on which the profits and losses of a partnership are to be shared is usually specified in the: a. uniform partnership act. b. articles of partnership. c. bylaws of the partnership. d. limited partnership act.
b. articles of partnership. The partnership agreement usually specifies the basis on which the profits and the losses are to be shared. If it does not fix the ratio of sharing the profits and losses, they will be shared equally, not in proportion to the contribution of capital. Review the section "Sharing of Profits and Losses" in Chapter 30.
With respect to the creation of a partnership, the Uniform Partnership Act provides that proof that a person received a share of profits is _____ evidence of a partnership. a. respondeat superior b. prima facie c. corpus juris d. quantum facie
b. prima facie With respect to the creation of a partnership, the Uniform Partnership Act provides that proof that a person received a share of profits is prima facie evidence of a partnership. This means that in the absence of other evidence, it should be held that a partnership existed. Review the subsection "Implied Agreement" under the section "Partnership Agreements" in Chapter 30.
When working for the partnership, each partner has a duty to use: a. average care. b. reasonable care and skill. c. care beyond a reasonable doubt. d. the highest degree of care
b. reasonable care and skill. Unless provided otherwise in the partnership agreement, each partner has a duty to work on behalf of the partnership and must use reasonable care and skill in conducting the firm's business. However, honest mistakes and errors of judgment do not render a partner liable individually. Review the subsection "Work for the Partnership" under the section "Duties of Partners" in Chapter 30.
Drake, Lisa, and Ben together started a restaurant and decided to share the profits equally among them. The restaurant ran up a $40,000 debt from expenses incurred in starting the business. Drake paid the debt from his personal funds. Which of the following is true? a. Drake, having paid the company's debt, gains the sole right to dissolve the partnership. b. Drake, having paid the company's debt, becomes the sole owner of the restaurant. c. Drake has the right to require Lisa and Ben pay their share of the restaurant's debt. d. Drake, being an equal partner in the business, need not be paid back by Lisa and Ben
c. Drake has the right to require Lisa and Ben pay their share of the restaurant's debt. A partner who pays a firm debt or liability from personal funds has a right to contribution from each of the other partners. Review the section "Contribution" in Chapter 30.
If Anna originally invested $5,000 and Caleb invested $1,000 in the business, and the business made a profit of $60,000, how would the profit be split? If the partnership agreement tells how the profits will be split, then they will be split using the terms of the agreement. If the partnership agreement does not tell how the profits will be split, then the will be split evenly ($30,000 to both). Regardless of what is in the partnership agreement, Anna will get $50,000 of the profit and Caleb will get $10,000. Both A & B.
Both A & B. If there is terms in the partnership agreement about how to split the profits, then the terms of the agreement will prevail. If not the Uniform Partnership Act assumes that all the profits will be split evenly among the partners, and losses will be split in the same way as the profits are split.
Assume that Wizard Internet is operating as a general partnership, what is Caleb's personal tort liability for Anna's actions within the scope of the business? Caleb is personally jointly and severally liable along with Anna. Caleb is personally liable only to the point where Anna could not pay damages. Caleb would only be personally responsible for his own actions, not those of Anna. Since it is a partnership, neither would have personal liability. Only the business itself would have liability.
Caleb is personally jointly and severally liable along with Anna. In a general partnership all partners are personally jointly and severally liable for the acts of any of the partners that occur within the scope of the business.
Adam and Molly started a restaurant in Jersey City and agreed to withdraw profits once a year. They made a profit of $500,000 in the first year of operation and $800,000 in the second year. Adam withdrew money from their profits several of times during the year without Molly's knowledge. He also convinced the accountant to manipulate the booksso Molly would not discover his withdrawals. Which of the following statements is true if Molly wanted to get the partnershipdissolved after discovering Adam's activities? a. Molly can get the partnership dissolved only by agreeing to continue sharing some profits from the restaurant with Adam. b. Molly can get the partnership dissolved only with the consent of Adam. c. Molly can geta court to issue a decree ofdissolution for violation of the partnership agreement. d. Molly cannot get the partnership dissolved before the time provided in the partnership agreement.
c. Molly can geta court to issue a decree ofdissolution for violation of the partnership agreement. Molly can ask a court to decree dissolution of the partnership. The law holds each partner to the utmost fidelity to the partnership agreement. Any violation of this agreement gives the other partners at least two rights: First, they can sue the offending partner for any loss resulting from the failure to abide by the partnership agreement; second, they may elect also to ask a court to decree dissolution of the partnership. Review the section "Exercise Loyalty and Good Faith" in Chapter 30.
Which of the following is true about a tenancy in partnership? a. A surviving partner gets full ownership on the death of the other partner. b. The personal creditors of one partner can only force the sale of specific pieces of partnership property to satisfy personal debts. c. The purchaser of one partner's share acquires only the right to receive the share of profits the partner would have received. d. The purchaser of one partner's share can demand acceptance as a partner by the other partners.
c. The purchaser of one partner's share acquires only the right to receive the share of profits the partner would have received.
Partners Julia, Dexter, Mike, Ralph, and Lisa owned Crackles, a toy manufacturing company. The company was located in Texas and was more than five years old. A businessman named Harmanasked Mike to purchase the toy store's goodwill for use in one of his business ventures. In return, he proposed to share a percentage of his profits with Crackles. While Mike, Ralph, and Lisa agreed to the proposal, Dexter and Julia objected to it. Which of the following is true? a. A majority vote plus the approval of the company's trustee is sufficient to agree to the proposal. b. A majority has the right to make a final and binding decision so long asCrackles gets 50 percent of the profits. c. Unanimous consent of the partners is required to agree to the proposal. d. A majority vote by the partners is sufficient to agree to the proposal.
c. Unanimous consent of the partners is required to agree to the proposal. Although a partnership operates on the basis of a majority vote, the majority rule does not apply to such actions as an assignment for the benefit of creditors, disposition of the firm's goodwill, actions that would make carrying on the firm's business impossible, confession of a judgment, or the submission of a firm claim to arbitration. Review the section "Abide by Majority Vote" in Chapter 30.
Under the _____ Act, incoming partners have liability for all debts as fully as if they had been partners when the debt was incurred to the limit of their investment in the partnership. a. Uniform Custodial Partnership b. National Partnership c. Uniform Partnership d. Limited Liability Partnership
c. Uniform Partnership Under the Uniform Partnership Act, incoming partners have liability for all debts as fully as if they had been partners when the debt was incurred, except that this liability for old debts is limited to their investment in the partnership. Withdrawing partners may contract with incoming partners to pay all old debts, but this agreement does not bind creditors. Review the section "Nature of Partnership Liabilities" in Chapter 30.
Tenancy in partnership is also called: a. dealer in partnership. b. testator in partnership c. owner in partnership. d. subscriber in partnership.
c. owner in partnership. Tenancy in partnership is also called owner in partnership. In a tenancy in partnership each partner owns and can sell only a pro rata interest in the partnership as an entity. Review the section "Partner's Interest in Partnership Property" in Chapter 30.
Gary and Lloyd wanted to open a restaurant and share the profits and losses equally. They found a suitable building that was owned by Jocelyn. She was reluctant to rent it to a new business with basically no assets and Gary and Lloyd knew it would take some time to generate profits from the business in order to pay rent. They suggested they pay Jocelyn a percentage of the profits in lieu of a fixed rent. What does this make Jocelyn? a. This makes Jocelyn an equal partner with Gary and Lloyd. b. This makes Jocelyn an implied partner with Gary and Lloyd. c. This makes Jocelyn a partner by estoppel. d. This makes Jocelyn the landlord of the business.
d. This makes Jocelyn the landlord of the business. While proof that a person received a share of profits is very good evidence of a partnership, this evidence can be overcome and the conclusion reached that no partnership existed by showing that the share of profits received represented rent on the building. Review the section "Implied Agreement" in Chapter 30.
What law gives a partner who pays a debt or liability of the firm a right to contribution from each of the other partners? a. Uniform Custodial Partnership Act b. Limited Liability Partnership Act c. National Partnership Act d. Uniform Partnership Act
d. Uniform Partnership Act The Uniform Partnership Act states that "the partnership must indemnify every partner in respect of payments made and personal liabilities reasonably incurred by him in the ordinary and proper conduct of its business or for the preservation of its business or property." Review the subsection "Contribution" under the section "Rights of Partners" in Chapter 30.
A written agreement that forms a partnership is called the: a. implied agreement. b. partnership estoppel agreement. c. customary articles. d. articles of partnership.
d. articles of partnership. The written partnership agreement is commonly known as the articles of partnership which varies according to the needs of the particular situation. Partners ordinarily need not have a written agreement providing for the formation of the partnership. Review the subsection "Written Agreement" under the section "Partnership Agreements" in Chapter 30.
Stephen and Oliver opened a bar in Charleston, South Carolina. Stephen invested $100,000 and Oliver $200,000 in the business. They signed a written agreement which specified their duties and responsibilities as partners. The agreement omitted a statement of how the profits and losses were to be shared between Stephen and Oliver. In such cases, the: a. trustee will decide and apportion the profits between them. b. sharing of profits will be determined by a judge. c. partner who invested more will get a greater share of profits. d. profits will be shared equally between the partners.
d. profits will be shared equally between the partners. .Profits will be shared equally between the partners. The partnership agreement usually specifies the basis on which the profits and the losses are to be shared. If the partnership agreement does not fix the ratio of sharing the profits and the losses, they will be shared equally, not in proportion to the contribution of capital. Review the section "Sharing of Profits and Losses" in Chapter 30.