Unit 10
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
The AMJ Partnership has 3 partners: Amy, who made a 60,000 capital contribution; May, who made a 20,000 capital contribution; and June, whose capital contribution was 10,000. The partnership agreement is silent about how profits will be divided. If the partnership makes 90,000 in profits, how will it be distributed?
30,000 each to Amy, May and June
Which of the following is NOT one of the recognized disadvantages of doing business as a corporation?
A corporation can be in existence for a maximum of 99 years.
A partnership will not terminate by operation of law if
A partner becomes insolvent
Which of the following is not required to create a partnership?
A written agreement between the parties.
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.
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.
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 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.
Which of the following issues do not require a unanimous vote of the partners?
Hiring an office manager for 40 hours a week.
Which of the following statements about a joint venture is true?
Individuals form it to conduct a single, or very limited, business activity
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
States give corporations many rights, among them the right to sue and the right to own property in the corporation's name. What do such legal rights collectively constitute for a corporation?
Legal capacity
Which of the following statements about the limited partner in a limited partnership is false?
Limited partners may participate fully in the management of the partnership.
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
Which of the following is the order in which partnership assets will be distributed upon termination of the partnership?
Outside-creditors, partner-creditors, capital contributions, undistributed profits.
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.
Another name for a tax option corporation is a
Subchapter S corporation
Which of the following statements about proprietorships is true?
The owner of a proprietorship is personally liable for all the debts of the proprietorship.
Which of the following is not a right of a partner?
The right to draw yearly interest on his or her capital contribution
Which of the following would bring about the dissolution of the partnership?
The time the partnership is to last, as stated in the partnership agreement, has expired All of the partners agree to end the partnership One of the partners dies. All of the above would bring about the dissolution of a partnership
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 whose primary business purpose is the buying and selling of goods is a ________partnership.
Trading
A partnership that buys and sells commodities is a _______________partnership; a partnership that produces goods or sells services is a _____________partnership.
Trading------------non-trading
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
What is the form of business organization that is subject to the most regulation at the state and federal level?
corporation
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
A partner who does not participate in management and whose existence is not known by the public is a _____________
dormant partner
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
T/F: A business organized as a proprietorship may have up to, but not more than, thirty-five owners.
false
T/F: A corporation can be in existence for a maximum of ninety-nine years.
false
T/F: A doctor who practices as part of a professional association cannot be sued for malpractice.
false
T/F: A limited partnership has to have at least two general partners and at least one limited partner
false
T/F: A partner's capital contribution may consist in business experience or service to the firm.
false
T/F: A partnership is a taxable entity.
false
T/F: Absent an agreement otherwise, each partner is entitled to compensation for his or her services in managing the business.
false
T/F: 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
T/F: 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
T/F: 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
T/F: Partners may use partnership property for both partnership and personal reasons.
false
T/F: Vic and Tom 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 Tom have formed a professional association.
false
If a partnership agreement does not say how losses will be shared, they will be shared
in whatever way the profits are shared
Nelson and Jack are both avid sailors. When a sailing acquaintance put his older, but still highly desirable, boat up for sale, Nelson and Jack agreed to pool their resources to buy and fix up the boat, then sell it and split the profits. This is an example of an______
joint venture
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
Partnership agreements often fund the purchase of a deceased partners' partnership interests with
life insurance policies
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
By statute, a limited partnership must have a minimum of ___________general 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
Partners hold title to partnership property as
tenants in partnership
T/F: A partnership maybe created by an express agreement between the parties or it may be implied from their conduct.
true
T/F: A person may become a partner without making a capital contribution.
true
T/F: Absent a contrary provision in the partnership agreement, all partners have equal rights in the management of the business.
true
T/F: If the partnership agreement does not state how long the partnership is to last, a partnership-at-will is created.
true
T/F: In a Limited Liability Company, the losses and profits pass through to the shareholders.
true
T/F: Legal capacity is the ability of an organization to sue and to own property.
true
T/F: Members of professional associations and professional corporations are eligible under the Tax Code to participate in pension and profit-sharing plans.
true
T/F: One partner has the ability to veto the admission of a new partner into the business.
true
T/F: Partners are agents of the partnership and of the other partners individually.
true
T/F: Partners have unlimited personal liability for the debts incurred by the partnership.
true
T/F: Partnership books must be kept in the firm's place of business and be accessible to all partners
true
T/F: Partnership books must be kept in the firm's place of business and be accessible to all partners
true
T/F: 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
T/F: Premiums paid by corporations for the health insurance it provides employees are tax-deductible expenses.
true
T/F: Professional corporations are business entities organized under state law.
true
T/F: Shareholders of a corporation may also be employees of that corporation.
true
T/F: Shareholders of corporations pay taxes on the dividends distributed to them by the corporation.
true
T/F: Subchapter S corporations may have a maximum of 100 shareholders.
true
T/F: The surviving partner is entitled to compensation for winding up the affairs of the partnership.
true
T/F: Unless agreed to otherwise, all partners have an equal vote in the management decisions of the partnerships.
true
T/F: Unless agreed to otherwise, partners are not entitled to compensation for work done to further the interests of the partnership.
true
A partnership that fails to comply with a state's assumed name statute
will not be able to use the courts of the state's assumed name statute May exposed the partners to criminal liability both b and c
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
