Exam 4
17. No partner has the power to dissolve the partnership before the expiration of the duration established in the partnership agreement.
Answer: F [Partner's have the power to do so (i.e., the right to disassociate themselves from the partnership by, for example, withdrawing from the partnership), but not the legal right to do so - there is a difference. Again, see the discussion in the master/study outline in your University Readers book on "Dissolution".]
21. The insolvency (i.e., bankruptcy) of a partner does not cause a dissolution of the partnership.
Answer: F [See the discussion in the master/study outline in your University Readers book on the causes of a dissolution (both wrongful and non-wrongful).]
19. The addition of a new partner causes a dissolution of the former partnership, as well as the creation of a different partnership, because the addition of the new partner brings about a change in the composition of the former partnership.
Answer: F [See the discussion on "Dissolution" in the master/study outline of your University Readers book.]
15. When a partnership is dissolved, even a partner who wrongfully caused the dissolution may demand a winding up of the partnership.
Answer: F [See the discussion on "Dissolutions" in the master/study outline in your University Readers book.]
22. A new partner who has joined an existing partnership has no liability whatsoever for partnership debts that existed before he became a partner.
Answer: F [See the master/study outline in your University Readers book—he/she is liable to the extent of his/her capital contribution to buy into the partnership to become a member of the partnership! See also Multiple Choice Question No. 22 and 28 below which relate to this question.]
5. If a partner causes the partnership to experience a loss as a result of a transaction concerning which she had apparent authority but neither express nor implied authority, she is not liable to the partnership for the amount of the loss.
Answer: F [She is liable to the partnership for such loss!]
10. One result of pressures and proposals for changes in corporate governance is that corporate boards of directors tend to have more inside directors, and hence fewer independent outside directors, than they once had.
Answer: F [The exact opposite is true!]
11. In the modern corporation, the board of directors makes most of the day-today management decisions.
Answer: F [The officers of the corporation do this, not the directors.]
1. A principal advantage, to shareholders, of the corporate form of business is that the money they have invested in the corporation is not at risk of being lost because of the claims of creditors of the corporation.
Answer: F [Their invested money is at risk. It's personal liability they are protected from when they form a corporation.]
5. Unlike shareholders of a publicly held corporation, shareholders of a close corporation do not have limited liability for corporate debts.
Answer: F [They do have such protection/limited liability.]
4. The Revised Uniform Limited Partnership Act's (RULPA's) provision on post-dissolution distribution of limited partnership assets allows the partners to eliminate the priority position of creditors by agreeing unanimously that creditors' claims will be paid after the partners have received the return of their capital.
Answer: F [This is obviously false. Think of the unfairness that would result to creditors if such partners could do this!]
11. Although a limited liability company (LLC) and its members receive the same federal tax treatment as an S Corporation and its shareholders, the LLC does not share the S Corporation's limits on number and types of owners.
Answer: T
2. Even though corporations are artificial legal entities rather than natural persons, they obtain the benefit of the due process guarantees given by the U.S. Constitution.
Answer: T
2. If a limited partner assumes personal liability on a specific partnership obligation, she does not thereby forfeit her limited liability concerning other partnership obligations.
Answer: T
2. In order for a partnership to guarantee the debt of another party, all of the partners must agree to do so, if the giving of that guarantee is "outside the course and scope" of the partnership's normal business.
Answer: T
5. Absent a contrary provision in the limited partnership agreement, a limited partner's withdrawal from the firm/LP does not result in dissolution of the limited partnership.
Answer: T
6. Unless they have reached an agreement to the contrary, partners share the partnership's losses according to/based on the number of partners in the partnership.
Answer: T
9. Corporate directors may cause corporate funds to be contributed to charity regardless of whether the shareholders have voted to make such a contribution.
Answer: T
9. When a limited partnership is dissolved and there are no general partners who have not wrongfully dissolved the firm, a limited partner may perform the winding up of partnership affairs.
Answer: T
10. In states that have enacted limited liability partnership (LLP) statutes, the liability of a partner in an LLP for his partners' malpractice is limited to the partnership's assets.
Answer: T [As a general rule this is true. See you're the master/study outline in your University Readers book. See also Multiple Choice Question No. 10 below.]
10. A person may have the liability of a partner even though she is not in fact anyone's partner.
Answer: T [E.g., via the doctrine of partnership by estoppel. See/read this section of the master/study outline in your University Readers book.]
9. Under federal tax law, income tax is not imposed on the partnership.
Answer: T [It is imposed on the individual partners on the tax returns they file as individuals; not on the partnership entity.]
1. A proper certificate of limited partnership need not state the name of each limited partner.
Answer: T [It need only state the name of the general partner(s).]
20. The value of an outgoing partner's interest in the partnership is determined as of the time of dissolution.
Answer: T [Note that when a partner leaves and a dissolution occurs, that partner will need to be "cashed out" (i.e., paid/compensated for his share and value of and in the partnership. To determine that value, we/courts look to and at the value of that partner's interest at the time the dissolution occurred. See also the brief discussion on this topic in the master/study outline in your University Readers book ("Right of Outgoing Partners").]
12. If a partner in a mining partnership "transfers" (i.e. "assigns") her partnership interest to another party (the transferee) without the consent of the other partners, the transferee is not a partner in the mining partnership.
Answer: T [See also Multiple Choice Question Nos. 7 and 27 below, and, Short Answer Question No. 6 below, and their discussion about charging orders and the assignment of a partnership interest.
12. Directors may forfeit the protection of the business judgment rule if their decision to oppose a tender offer (from an outside firm/individual for the purchase of the corporation) resulted from an inability on the part of the directors to separate their own interests in remaining directors from the best interests of the corporation.
Answer: T [See the discussion of the business judgment rule in the master/study outline in your University Readers book; see also Short Answer Question No. 1 below.]
6. A shareholder may be held personally liable to the corporation's creditor if the corporation and the shareholder have depleted corporate assets by engaging in less-than-arm's length transactions with each other.
Answer: T [See the discussion on "Piercing the Corporate Veil" in the master/study outline in your University Readers book; see also Short Answer Question Nos. 3 and 4 below.]
8. In some states , those who make wholly defective and ineffective attempts to incorporate a business (e.g., such as failing to prepare and file articles of incorporation, or, failing to create and adopt corporate bylaws) may be treated as partners with unlimited liability for the obligations of the business.
Answer: T [See the discussion on "Steps in Incorporation" in the master/study outline in your University Readers book.]
4. Although publicly held corporations and close (i.e., privately held) corporations are generally treated alike under the various states' corporation laws, some states give close corporations greater latitude and flexibility in regulating their internal affairs than is given to publicly held corporations.
Answer: T [See the discussion on "close corporations" in the master/study outline in your University Readers book and your textbook.]
23. A partner who conducts the winding up of partnership affairs ordinarily is not entitled to special compensation or payment for conducting that winding up process.
Answer: T [See the discussion on "winding up" partnerships in the master/study outline in your University Readers book.]
3. A restriction on a partner's express or implied authority does not prevent that partner from having apparent authority.
Answer: T [See the discussion on express, implied and apparent authority in the master/study outline in your University Readers book. You will see that this revisits the concepts of actual and apparent authority that we studied and you learned (hopefully) when we studied the Torts and Agency law material.]
11. A partner does not have the right to use partnership property for his own personal purposes even if the partnership agreement is silent on that issue.
Answer: T [See the duties that partners owe on another in the master/study outline in your University Readers book.]
8. The broad implied authority of a partner normally would not include the implied authority to sell the partnership's real property on behalf of the partnership.
Answer: T [The selling of real estate is such a big thing/deal that in most cases it would not be considered to be a part of a partner's implied authority to act on behalf of the partnership.]
18. Dissolution does not automatically end the business of a partnership.
Answer: T [This is true because the remaining partners can elect to continue the business/the partnership.]
4. A partner may, for his own financial benefit, engage in the same business as that of the partnership if he does so on his own time.
Answer: F [No. To do so he violates his fiduciary "duty not to compete" against the partnership.]
4. Which of the following is an inaccurate statement about limited liability companies (LLCs)? a. Most states that have LLC statutes require that an LLC have at least three, but no more than ten, members. b. Members or mangers who manage an LLC are fiduciaries of the LLC. c. "Bogus Co." would not be a proper name for an LLC. d. The Internal Revenue Service has ruled that LLCs are recognized/treated as partnerships for federal income tax purposes.
Answer: A
6. According to the law governing partnerships, a. partners do not own partnership property in individual proportionate shares. b. loans made by a partner to the partnership are always considered partnership capital. c. A partner's rights and duties in a partnership (along with his/her partnership property) pass to her heirs upon her death. d. Property used in the partnership's business must be owned by the partnership.
Answer: A
23. Absent a contrary provision in the partnership agreement, a partnership becomes dissolved without a court order to that effect if: a. a partner dies. b. a partner becomes insane. c. a partner becomes permanently disabled. d. any one of the above circumstances occurs.
Answer: A [Again, see the causes of a wrongful and non-wrongful dissolution in your University Readers book.]
13. Of the following statements concerning criminal liability of partners and partnerships to be convicted of crimes, which is/are inaccurate? a. Most modern criminal codes do not allow partnerships to be convicted of crimes. b. If a partner commits a crime within the course and scope of transacting partnership business, the other partners are not usually held criminally liable. c. If one partner actually commits a crime that the remaining partners authorized, all of the partners will have criminal liability. d. A, B, and C.
Answer: A [An example of why "A" is not true would be the Arthur Anderson accounting firm/partnership example that we have discussed in class and/or you read about earlier in the course in those articles in your University Readers book!! Remember ... Arthur Andersen was a partnership that was convicted of a crime - destroying documents that were part of a government investigation.]
20. In winding up the affairs of a partnership, the partners doing the winding up: a. may borrow money and create an accompanying partnership obligation if doing so would preserve partnership assets or enhance their sale value. b. are prohibited from electing to perform partnership contracts on which performance had not begun before dissolution of the partnership (i.e., complete executory contracts). c. are prohibited from borrowing money and creating a partnership obligation to that effect. d. may enter into new contracts for a wholly new and unrelated business so long as it's not necessary to borrow money in order to perform the obligations created by those new contracts.
Answer: A [As to why the answer is "A", see the discussion on "winding up" in the master/study outline in your University Readers book.]
11. Jill is a limited partner in the Aanama Limited Partnership. Jill invested $5,000 to buy her interest. Jill is one of ten (10) partners, two (2) of whom are general partners. Aanama has gone bankrupt, with debts exceeding assets by $96,000. The partnership creditors sue all the partners for these debts. Based on these facts, the most that Jill must now contribute is: a. $0. b. $4,600. c. $5,000. d. $9,600. e. $96,000.
Answer: A [Remember ... for legitimate limited partners, they can only lose their investment in the limited partnership. After that, they generally have no other liability.]
14. Xavier, Yancey and Zebulon were partners in the XYZ Partnership. Their partnership agreement stated that Xavier would bear 60 percent of partnership losses, with Yancey and Zebulon each bearing 20 percent of partnership losses. XYZ's business failed, with various partnership debts being left unpaid. After all partnership assets had been exhausted for the benefit of the firm's creditors, $90,000 remained due and owing to the creditors. On these facts, how much may the creditors lawfully collect from Zebullon? a. $90,000 b. $18,000 c. $30,000 d. 0
Answer: A [Remember that an agreement between/among partners as to how they will divide profits/losses is not binding on a creditor was/is not a party to that agreement! And, as you know, one of the downsides of being a partner in a partnership is that you are personally liable for partnership debts if the partnership assets are insufficient to satisfy the monies owed to creditors!!]
2. Which of the following is an accurate statement about limited liability companies (LLCs)? a. An LLC pays no federal income tax; instead, income of an LLC is reported by its members on their tax returns. b. LLC members are individually liable for LLC obligations. c. Because an LLC is not an entity separate from its members, an LLC cannot be sued in its own name. d. Although an LLC is not an entity separate from its owners, an LLC may sue in its own name.
Answer: A [See also True False Question No. 6 above.]
7. A promoter will remain liable on a contract made by him on behalf of a proposed corporation only if the corporation is never formed.
Answer: F [Not "only" (read the question closely!); see the discussion on promoters/incorporators in the master/study outline in your University Readers book; see also Short Answer Question No. 5 below]
7. Olive is a partner in Oil Ltd. One of Olive's personal creditors, Castor, has obtained a judgment against Olive, as well as a charging order against Olive's interest in Oil Ltd. What right (s) does Castor have? a. The right to receive Olive's share of the partnership profits. b. The right to engage in management of the partnership business. c. The right to inspect partnership books and records. d. Each of the rights set forth above.
Answer: A [See the discussion in the master/study outline in your University Readers book on "Assignment of Partnership Interests". Note that a charging order is a court order that allows a creditor to attach a partner's interest in a partnership (i.e., his/her share of the profits). It does NOT allow the creditor to become a partner, participate in the management of the partnership, etc. Further, if you review that section of your University Readers book closely, you will see that a charging order is something very different than an "assignment-of-apartnership interest", so be sure to see and read that section closely so you will know and understand the difference between the two!! See also True False Question No. 12 above, Multiple Choice Question No. 27 below, and Short Answer Question No. 6 below.]
5. Prior to the incorporation of Pyle Co. (a manufacturing business), Gomer, who was acting as a promoter for Pyle, negotiated a contract for the purchase of manufacturing equipment from Sergeant-Carter Corp. The contract was entered into on behalf of and in the name of Pyle Co. Shortly thereafter, a certificate of incorporation was issued to Pyle Co. by the Secretary of State. In view of the facts just stated, which of the following statements is accurate? a. Gomer is liable on the contract with Sergeant-Carter Corp. b. When Pyle Co. received its certificate of incorporation, it became liable on the contract with Sergeant-Carter Corp. c. The contract is void, because Pyle Co. was not in existence at the time the contract was formed. d. If Pyle Co.'s board of directors issues a suitable resolution, Gomer will be relieved from all liability on the contract.
Answer: A [See the discussion in the master/study outline in your University Readers book on promoter/incorporator liability; see also Short Answer Question No. 5 below. Also note that "D" is incorrect because it's Sergeant who must agree to this/such a release, not whether Pyle's board of directors so states/votes (see, e.g., Multiple Choice Question No. 9 below).]
2. Shareholders of a corporation: a. ordinarily play little role in the day-to-day management of the corporate business. b. will lose their limited liability if they engage in any management of the corporate business. c. cannot serve as officers of the corporation. d. cannot also be creditors of the corporation.
Answer: A [With respect to "A", it's the officers of the corporation, not the shareholders, who do this. "B" is not correct because this only applies to limited partnerships.]
3. Which of the following is an accurate statement concerning subchapter S corporations? a. They are treated much as partnerships are treated for federal income tax purposes. b. They must have at least 100 shareholders. c. They pay income taxes in the same manner that ordinary corporations do. d. None of the above.
Answer: A [With respect to "A", remember that one of the unique features of an S corporation is its "flow through" tax treatment advantage (i.e., the profits of the corporation are passed/flowed through to the shareholders who in turn declare the appropriate amount as income on their individual tax returns. With respect to "B", the rule states that S corps can have no more than 100 shareholders, not that they "must" have at least 100 shareholders.]
3. "Partnership property": a. includes all property used in the partnership business, regardless of who owns it. b. ordinarily includes property purchased with partnership funds for use by the partnership. c. must be titled/owned in the partnership name. d. includes property originally contributed to the partnership, but not property purchased later on with partnership funds.
Answer: B
16. Which of the following may be done without the unanimous consent of the partners in an ordinary partnership? a. Assigning partnership property for the benefit of creditors. b. Selling items of the partnership's inventory in the ordinary course of business in which the partnership is engaged. c. Submitting a dispute involving the partnership to arbitration. d. Confessing/admitting a court judgment against the partnership in favor of a creditor.
Answer: B [A, C, and D are all examples of acts that are outside the scope of the "ordinary affairs of the partnership business", and, hence, are incorrect.]
26. If a partner causes the wrongful dissolution of the partnership, a. the innocent partners acquire the right to continue the partnership business by themselves, but not with new partners. b. he loses the right to demand that the partnership business be wound up. c. he is entitled to receive the value of his partnership interest plus his share of the partnership's goodwill, less damages caused by the wrongful dissolution. d. each of the above consequences is triggered.
Answer: B [Again, see the discussion on "Dissolution" in the master/study outline in your University Readers book.]
19. Edith, Archie, and Gloria were partners in EAG Partnership, which has been dissolved. When EAG was formed, Edith contributed capital of $90,000, Archie contributed capital of $45,000 and Gloria contributed capital of $15,000. The three partners agreed to share profits and losses in this manner: 50 percent to Edith; 30 percent to Archie; and 20 percent to Gloria. Following liquidation of all partnership assets and distribution of the proceeds to creditors, there remains $36,000 due and owing to outside partnership creditors. Among Edith, Archie, and Gloria, which amount represents Edith's proper share of the amount still owed to creditors? a. $18,000 b. $3,000 c. $21,600 d. $12,000
Answer: B [Among the three partners, Edith's proper share of the amount still owed to creditors is $3,000. The total partnership loss here is $186,000 ($150,000 in contributed capital plus $36,000 in debt remaining after liquidation assets). Edith's share of the loss is $93,000 (50 percent of $186,000), because here the partners agreed that split of profits and losses. Because Edith has already lost her $90,000 capital contribution, she must contribute only another $3,000. Do realize, however, that if creditors compel her to pay/chase her for more than the $3,000 (which they can do - they can elect to chase her for the full $36,000 from, for example, her personal/non-partnership assets), she will then have a claim against Archie and Gloria for any amounts she pays in excess of $3,000; whether she can/will be able to collect it from them is another manner, but she at least has that legal claim for reimbursement she could assert against the them (it's called "indemnification" -- which is a legal word for reimbursement). See also Multiple Choice Question No. 24 below, and, Short Answer Question No. 8 below.]
15. A partner has the implied authority to bind the partnership: a. only on those contracts that he, according to the terms of the partnership agreement, is expressly authorized to make. b. on contracts that are usually appropriate for the business in which the partnership is engaged. c. only if the partnership agreement specifically states that he will have such implied authority. d. whenever a third person justifiably believes that the partner has authority to enter into a contract with her on behalf of the partnership.
Answer: B [An example of this would be one of the partners in a construction business partnership stopping by Staples or Best Buy to buy a computer to be used in and for the partnership's construction business. Chances are his doing so is/was not addressed in any written or oral partnership agreement between the partners, but, it can be said that he has the implied authority to enter into this particular contract (the purchase of a computer with Staples or Best Buy) on behalf of the partnership.]
7. A corporation's bylaws: a. provide the basic source from which the corporation's powers are derived. b. may supplement the articles of incorporation by more precisely defining rights and responsibilities of parties involved in the corporate structure. c. are controlling when they conflict with the articles of incorporation, in keeping with the legal principle that specific provisions control general provisions when the two appear to be in conflict. d. can be amended only by the corporation's board of directors.
Answer: B [Choice "A" is wrong because it's the Articles of Incorporation that do this!]
11. Ace Deuce is one of the partners in a retail hardware store business (which is considered a "trading partnership"). The partnership frequently must borrow money in order to purchase inventory and satisfy other operating requirements. Needing money to pay some personal debts, Deuce recently borrowed $15,000 from Tenth National Bank. He signed the name of the partnership on all documents connected with the loan. Although he informed Tenth National that the money was for the partnership, he actually used the money only for himself. Deuce is now unable to repay the debt. Is the partnership liable to Tenth National for the debt? a. No, because Deuce committed fraud upon the Tenth National, his partners, and the partnership. b. Yes, because this partnership is a trading partnership for which borrowing is considered to be in the ordinary course of its business c. No, because Deuce was acting outside the scope of his authority as a partner when he borrowed the money. d. Yes, because Deuce was negligent in failing to tell Tenth National the real purpose of the debt, and because the negligence of a partner is imputed to the partnership.
Answer: B [Note that a "trading partnership" is a partnership that has an inventory; that is, its regular business is buying and selling merchandise such as retailing, wholesaling, importing and exporting. For example, a toy store and a clothing store are trading partnerships. Since there is a time lag between the date they pay for their inventory and the date they sell inventory to their customers, these firms ordinarily need to borrow to avoid cash flow problems. Therefore, a partner of a trading partnership (like the one that is the subject of this question), has the implied and apparent authority to borrow money for the partnership!! See also Short Answer Question No. 3 below.]
2. Jacques Strappe operates a sporting goods store. As a means of repaying debts owed to Clete Marx, Strappe granted Marx a share of the profits made in the sporting goods store business. In addition, Strappe and Marx agreed that Strappe would consult Marx before incurring any additional business-related debt from other sources. Are Strappe and Marx partners? a. Probably, because Marx has been granted a voice in management of the business. b. Probably not, because the Strappe-Marx relationship is more of a debtor and creditor. c. Probably, because of their agreement to divide the profits in some manner. d. Probably not, because nothing in the facts indicates that Strappe and Marx called their relationship a partnership.
Answer: B [Re: choice "B", this conduct/acts described in the question are probably not enough to trigger the applicability of the Uniform Partnership Act (UPA) test (and satisfy it) that's discussed in the master/study outline of your University Readers book.]
30. Bob and Harry form a partnership to invest in rental property in a college town. Bob and Harry each initially invested $600,000 into the partnership, but they did not execute a written partnership agreement. Of the time spent locating properties to buy, finding tenants, and maintaining buildings, etc., Bob was responsible for 80 percent of the effort and Harry 20 percent. Both Bob and Harry accepted that Bob was devoting far more time to the partnership than Harry was. At the end of the year, Bob assumed that he would be allocated 80 percent of the profits. Harry wants to split the profits evenly. Which of the following is true? a. Bob is entitled to 80 percent of the profits because 80 percent of the efforts came from him. b. Bob and Harry will split profits evenly. c. Half of the profits will be split evenly because of the equal capital investments, and the other half will go 80 percent to Bob and 20 percent to Harry. d. Bob and Harry will split profits evenly, but if Bob had also contributed 80 percent of the capital, he would be entitled to 80 percent of the profits.
Answer: B [See also Multiple Choice Question No. 9 above.]
27. What is the effect of a partner assigning her partnership interest in a partnership to another person (called an "assignee")? a. The assignee takes over the assigning partner's management role in the partnership. b. The assignee obtains the assigning partner's rights to profits in the partnership,but no rights in the management of the partnership. c. The assignment amounts to a transfer of ownership, automatically resulting in a dissolution of the partnership. d. The assignment removes the assigning partner from the partnership, but the partnership remains in existence with the remaining partners as partners. e. The assignee acquires a right to receive payment from the partnership for the fair market value of the entire partnership.
Answer: B [See also True False Question No. 12 above, Multiple Choice Question No. 7 above, and, Short Answer Question No. 6 below.]
28. When a new partner is admitted to a preexisting partnership, the new partner has: a. Unlimited personal liability for obligations of the partnership, both for those arising before she joined the partnership and those arising after joining. b. Liability to the extent of her investment in the partnership for obligations from before joining the partnership, and unlimited liability for those arising afterwards. c. Liability only to the extent of her investment in the partnership for all obligations, arising either before or after she joined the partnership. d. No liability whatsoever for obligations arising from before she joined the partnership and unlimited liability for those arising afterwards. e. No liability whatsoever for obligations arising from before she joined the partnership and limited liability for those arising afterwards.
Answer: B [See also True False Question No. 22 above and Multiple Choice Question No. 22 above.]
1. Beau and Candy are the only general partners in a limited partnership. Each has contributed capital of $40,000. Maggie and Cosmo are the only limited partners in the firm. Maggie has contributed capital of $40,000. Cosmo has contributed capital of $80,000. The limited partnership has a profit of $180,000 to distribute. Under the Revised Uniform Limited Partnership Act (RULPA) rule for sharing of profits, what is Cosmo's share of the profit? a. $45,000 b. $72,000 c. $80,000 d. $92,000
Answer: B [See the "Rights & Liabilities of Partners" section in the study/master outline in your University Readers book. Note that unlike a general/ordinary partnership, in a limited partnership unless the limited partnership agreement provides to the contrary, the partners share profits in accordance to their capital contributions, NOT according to the number of partners!! See also Short Answer Question No. 2 below.]
4. The articles of incorporation must include: a. the name of each person who will serve as an initial director of the corporation. b. a statement of the number of shares of stock that the corporation has authority to issue. c. a statement of the par value of the shares of stock to be issued by the corporation. d. each of the above.
Answer: B [See the master/study outline in your University Readers book on what the Articles of Incorporation "must" and "may" have in them.]
17. W, X, Y, and Z are partners in WXYZ Partnership. W committed a tort upon Plaintiff. Assume that under applicable law, X, Y, and Z are vicariously liable for that tort as well. Of the following statements concerning the facts, which is accurate? a. if Plaintiff wishes to enforce her tort claim, she must sue all four of the partners. b. In most states, the only individual partner Plaintiff can sue is W, with the partnership being a permissible additional defendant she can add. c. Plaintiff would be permitted to sue X, Y, and Z and enforce her claim against any of them if she so chooses. d. None of the above.
Answer: C
8. Nimrod served as a promoter concerning Flaky Industries, Inc. prior to its incorporation. During the pre-incorporation period, Nimrod purchased manufacturing equipment in contemplation of selling it to the corporation once it was formed. After Flaky was properly incorporated, Nimrod sold it the equipment for $90,000. He did not tell the Flaky directors that the equipment had cost him only $50,000. In light of the facts, which of the following statements is accurate? a. Once Flaky came into existence, Nimrod's fiduciary duty to the corporation ceased and he became entitled to receive the highest price he could command for the equipment without disclosing his actual costs. b. Because Flaky was already incorporated before Nimrod's sizable profit came to light, Flaky cannot bring an action against him to recover monetary compensation. c. Nimrod's continuing fiduciary duty to the corporation was violated when he failed to make a full disclosure concerning what he had paid for the equipment; therefore, Flaky may rescind (i.e., cancel) the purchase or recover Nimrod's profit. d. The secret profit received by Nimrod amounts to "watered shares", meaning that he is liable to each Flaky shareholder in the amount by which his secret profit reduced the value of that shareholder's investment in the corporation.
Answer: C [Again, see the discussion in the master/study outline in your University Readers book on promoters/incorporators.]
4. Boris and Natasha agreed to operate a waterbed sales business together and to split the profits made thereby. Although they began operating the business together and splitting the profits, they never signed a formal partnership agreement. Are they partners? a. No, because they simply agreed to conduct business together. b. Yes, unless they labeled their relationship as something other than a partnership. c. Yes, in all likelihood, even if they did not expressly call their relationship a partnership. d. No, because they did not have an agreement in writing
Answer: C [Again, see the discussion of the UPA in the master/study outline of your University Readers book. Here, unlike Question Nos. 1 and 2 above, the UPA test most likely IS satisfied!!]
3. Arthur and Alan decided to open a retail store and to operate the business as a partnership. Because they needed additional funds to get the business in operation, they asked Jayne whether she would like to invest money in business and become a limited partner. Assuming that Jayne becomes a limited partner, which of the following statements is accurate? a. Jayne's status as a limited partner gives her a substantial stake in the operation of the business; therefore, she is entitled to participate in the day-to-day management of the business to protect her investment. b. If Jayne later becomes an employee of the limited partnership, she will lose the advantage of the limited liability that ordinarily accompanies limited partner status. c. Jayne will not have personal liability for partnership debts, although it is possible that partnership losses may be so significant that she will lose the money she invested in the business. d. None of the above.
Answer: C [See and compare Short Answer Question No. 1 below.]
6. Nimble was a general partner in Shaky Limited Partnership prior to the firm's dissolution. Before the dissolution, Nimble loaned the firm $10,000. The loan was not repaid before the dissolution took place. Shaky also owes debts to creditors X, Y, and Z. When Shaky's assets are liquidated and distributed, what priority does the RULPA give to Nimble's claim for repayment of the loan, in relation to the priority given to the claims of X, Y, and Z? a. A lower priority than what is given to the claims of X, Y, and Z, because the loan by Nimble is considered a contribution of capital. b. A higher priority than what is given to the claims of X, Y, and Z, because Nimble is a partner-creditor. c. The same priority given to the claims of X,Y, and Z, because in this situation Nimble is considered a creditor of the firm. d. No priority whatsoever, meaning that Nimble's claim will be paid only if assets remain after all other claims of whatever nature are paid.
Answer: C [See the "Distribution of Assets" section in the master/study outline in your University Readers book."]
22. The liability of an incoming partner for partnership obligations arising after she becomes a partner: a. is limited the amount of her capital contribution. b. begins when notice of her joining the partnership is given. c. is unlimited in extent and scope. d. is limited to the extent of partnership assets.
Answer: C [See the discussion in the master/study outline in your University Readers book on the liability of incoming and outgoing partners. Hence, such a partner would lose her capital investment/contribution she made to become a partner (to "buy into" the partnership), and, she would remain personally liable for such obligations!! See also True False Question No. 22 above and Multiple Choice Question No. 28 below.]
3. Because the federal government has control over interstate commerce, a business in interstate commerce and organized under the corporate form must become incorporated pursuant to federal incorporation statutes.
Answer: F [No. It's state incorporation statutes.]
8. Larry Legbreaker, a partner in a used car sales business, was authorized by his partners to repossess cars from purchasers who had failed to make the agreed installment payments. This included "doing whatever it took to get the job done." While repossessing a car from Todd Pockmarkt, Legbreaker convinced an initially reluctant Pockmarkt to be cooperative by shoving him to the ground. Pockmarkt sustained a brain concussion when his head struck the concrete driveway where the car being repossessed was parked. If Pockmarkt sues for damages stemming from Legbreaker's battery, will Legbreaker's partners in the used car business be held liable? a. No, because the other partners obviously would not have authorized Legbreaker to commit a battery. b. Yes, because partners are always liable for the torts committed by their fellow partners. c. Yes, because the tort was committed while Legbreaker was within the scope of an action for the partnership. d. No, because only the individual partner who committed the tort can be held liable.
Answer: C [See the discussion in the master/study outline in your University Readers book re: "Liability of Partners for the Torts Committed by Other Partners" and how we see the doctrine of respondeat superior (which you learned when we studied "Torts and Agency Law" in connection with Exam 2) come up again in the context of partnership law. Choice "C" is simply an example of respondeat superior in action in the context of partnerships and partnership law. Here, a strong argument can be made that this tort (battery) was, in fact, committed within the course and scope of Legbreaker's duties as a partner because he was instructed to "do whatever it took to get the job done".]
24. The order of distribution of partnership assets upon dissolution is: a. first to satisfy outside creditors' claims; then repay partners for any loans they made to the partnership; then to pay partners their shares of profits; then to return to partners the capital contributions they made to get (or keep) the partnership going. b. first to satisfy outside creditors' claims; then to return to partners the capital they invested to get (or keep) the partnership going; then to repay to partners any loans they made to the firm; then to pay partners their shares of the profits. c. first to satisfy outside creditors' claims; then to repay to partners any loans they made to the firm; then to repay partners their capital contributions made to get (or keep) the partnership going; then to pay partners' their shares of profits. d. not accurately set forth in any of the above answers.
Answer: C [See the discussion on "Distribution of Assets" in the master/study outline in your University Readers book.]
9. Cowlings, Kaelin, and Simpson formed a partnership. They made no express agreement concerning how profits were to be divided. Of the $100,000 initial capital of the firm, Cowlings and Simpson each contributed $40,000. Kaelin contributed $20,000. The partnership had a profit of $150,000 during the first year the partnership business was in operation. What is Kaelin's share of the profit? a. $30,000 b. $20,000 c. $50,000 d. $10,000
Answer: C [See the material in the master/study outline in your University Readers book re: how partners in a partnership share profits and losses. You will see that in a general/ordinary partnership, in the absence of an agreement to the contrary on the issue, partners share profits equally/based on the number of partners, not in accordance to the percentage of their capital contributions. See also Multiple Choice Question No. 30 below.]
10. In a partnership, the partners have a "duty to account" for: a. Any purchases they make for the partnership. b. Any sale of partnership property. c. Any funds received by them as agents of the partnership. d. All of the above.
Answer: D
12. Roy, Rhonda, and Reggie are partners in Triple R Investments. Roy has proposed to sell the partnership an office building her personally owns. Rhonda and Reggie, who have agreed that the partnership should make the purchase, do not know that Roy is the owner of the office building. The building is located in another city and will not be inspected by Rhonda and Reggie before the purchase takes place. Roy is aware, but Rhonda and Reggie are not aware, that the building needs a complete electrical rewiring job whose cost would be several thousand dollars. The price Roy has agreed to accept for the building is $275,000 — a fair price given the building's location, condition, (including the need for the rewiring), and other pertinent factors. On these facts, Roy a. is free to sell Triple R the building without violating his duty to self deal, because he is asking a fair price and is therefore proceeding in good faith. b. has violated his duty of loyalty and good faith, because partners cannot engage in any self-dealing transactions with their partnership. c. has not engaged in prohibited self-dealing because his partners' agreement to purchase the building constitutes approval of the transaction. d. must disclose, before the purchase takes place, the fact that he owns the building and that the building needs rewiring; otherwise, he will violate his duty to the partnership to not self-deal.
Answer: D
21. When may the non-withdrawing partners continue the partnership business? a. When the partnership agreement permits it. b. When the withdrawing partner has dissolved the partnership in violation of the partnership agreement. c. When the withdrawing partner dissolved the partnership nonwrongfully, and he and all of the non-withdrawing partners agree to the continuation. d. In each of the above situations.
Answer: D
7. In which of the following types of partnerships is the liability (limited liability as in loss of capital investment, and/or, unlimited liability -- as in personal liability) the same for all partners? a. General Partnership. b. Limited Partnership. c. Limited Liability Partnership. d. A and C only. e. B and C only.
Answer: D
8. What is the effect of having a corporation as the general partner of a limited partnership? a. The limited liability of the corporation will result in the limited partners having greater liability than they would otherwise have. b. Each shareholder of the corporation will be treated as a general partner of the limited partnership. c. Each shareholder of the corporation will be treated as a general partner of the limited partnership. d. The liability of the corporate general partner will be limited to the amount of its corporate assets.
Answer: D
1. A corporation: a. must be organized for the purposes of making a profit. b. does not obtain constitutional protection against unreasonable searches and seizures because it is not considered a person under the U.S Constitution. c. must use shareholders as its officers and directors. d. is a legal entity separate from those who own the corporation even if the corporate ownership consists of a single shareholder.
Answer: D ["A" is not correct because remember that non-profit corporations often do not make a profit!]
9. Jim acted as a promoter for Tammy Co. prior to its incorporation. He negotiated a contract with Plaster, Inc. Under the contract, which Jim signed in the name of Tammy Co., Plaster was to supply Tammy with essential ingredients and substances that Tammy would use in its makeup manufacturing operation. At the initial board of directors meeting following the incorporation of Tammy, the Tammy board adopted the contract Jim had negotiated with Plaster. After Plaster had performed its contract obligation but before Tammy paid what was called for by the contract, Tammy became insolvent and unable to make payment. Plaster is now looking to Jim for payment. Is Jim liable to Plaster? a. No, because once Tammy Co. was actually incorporated, any liability he may have had on the contract was discharged. b. Yes, because he committed fraud by entering into a contract on behalf of a nonexistent party. c. No, because Tammy Co.'s adoption of the contract had the effect of releasing him from liability on the contract. d. Yes, because nothing in the facts indicates that Plaster has released Jim from liability on the contract.
Answer: D [Again, see the discussion in the master/study outline in your University Readers book on promoters/incorporators; see also Multiple Choice Question No. 5 above and Short Answer Question No. 5 below.]
31. A partnership has $100,000 in assets. Outside creditors are owed $70,000, Partners are owed $60,000 on their loans to the partnership, partners have capital balances of $80,000, and profits in the current year are $90,000. At this point how much are the partners entitled to receive for their capital balances? a. $0. b. $20,000. c. $30,000. d. $60,000.
Answer: D [See also Multiple Choice Question No. 24 above.]
6. Courts will allow the "piercing of the corporate veil": a. whenever there is a parent-subsidiary relationship between two corporations b. whenever the parent corporation dominates its wholly-owned subsidiary corporation. c. whenever a corporation has only one shareholder. d. whenever a parent corporation's domination of its wholly-owned subsidiary was for an improper purpose.
Answer: D [See also Short Answer Question Nos. 3 and 4 below.]
5. Chip is one of the limited partners and Skip and Bambi are the general partners in a certain limited partnership. The business of the limited partnership is investing in works of art. Chip has received reliable information indicating that Skip and Bambi have been buying and selling some works of art on their own, without making the opportunities available to the limited partnership. Although Chip would like to bring a derivative suit against Skip and Bambi on the theory that they breached their fiduciary duties to the limited partnership, he is concerned that by doing so, he may forfeit his limited liability (as a limited partner). Will he lose his limited liability if he brings the derivative suit? a. Yes, because the decisions of Skip and Bambi not to have the partnership involved in certain purchases and sales were ordinary business decisions. b. No, because limited partners have the same voice in management decisions that general partners have. c. Yes, because the filing of the suit would be an impermissible attempt to exercise control over the limited partnership's business. d. No, because a limited partners' attempt to enforce other partner's fiduciary duties does not constitute exercising control over partnership business.
Answer: D [See and compare Short Answer Question No. 1 below.]
18. Cosmo and frank have been partners in a clothing sale business for several years. Their partnership agreement sets forth a duration that will not expire for four more years. Cosmo has found that it takes considerable effort to get along with Frank, who is a moody person with a gruff manner. The two of them have had numerous disagreements through the years. Tired of dealing with Frank, Cosmo has filed suit against him in an effort to obtain a court-ordered dissolution of the partnership. Will the court grant the requested dissolution? a. No, regardless of whether the business is profitable or unprofitable. b. Yes, regardless of whether the business is profitable or unprofitable. c. Yes, because the partnership is a partnership at will. d. No, if the business is profitable.
Answer: D [See the "Dissolution" discussion in the master/study outline in your University Readers book. You will see that unless the partnership agreement provides to the contrary, a disagreement among the partners that does NOT threaten partnership assets or profitability is NOT enough to cause a dissolution of the partnership. Thus, beware who you become partners with!!!]
9. Which of the following is not required to be included in a Certificate of Limited Partnership? a. The name of the limited partnership. b. The name and address of an agent for service of legal process. c. The name and address of each general partner. d. The portion of profits to be distributed to each limited and general partner. e. The latest date on which the limited partnership is to dissolve.
Answer: D [See the discussion in the master/study outline in your University Readers book discussing the paperwork needed to form and start a limited partnership (specifically, a Certificate of Limited Partnership).]
25. Hamlet, Ophelia, Othello, and Desdemona were partners in a dissolved partnership, HOOD Enterprises, whose business was the manufacturing and sale of widgets. Ophelia is conducting the winding up of the partnership business. HOOD has a contract to supply 20,000 widgets to the We R Widgets chain of stores. Performance of the contract has not yet begun. In addition, HOOD has 35,000 unsold widgets in stock. HOOD also owns the building in which the manufacturing operation has been conducted. For which of the following does Ophelia possess express or implied authority during the winding up process? a. Painting the building in preparation for selling it. b. Selling the 20,000 widgets to We R Widgets. c. Selling the building. d. Each of the above.
Answer: D [See the discussion in your master/study outline in your University Readers book on "winding up".]
5. Otto and Edna have been partners in a used car business for five years. Last year, Edna bought ten used cars with her own money and then sold them on her own time. She made profits totaling $8,000 on the sales. Is Otto entitled to an appropriate share of the $8,000? a. Yes, because when two persons are partners, any income made by one of them from any endeavor must be shared with the other. b. No, because Edna bought the cars with her own money. c. No, because the profits were not profits made by the partnership business. d. Yes, because Edna owed Otto and their partnership a duty not to compete with the partnership business.
Answer: D [See the discussion in your master/study outline on the "duties that partners owe each other.]
6. A limited liability company (LLC) pays federal income tax just as a corporation does.
Answer: F [No. The members of an LLC pay federal income tax in their individual tax returns; while a regular corporation files a corporate tax return and pays tax on its income. See also Multiple Choice Question No. 2 below.]
1. Maggie and Cosmo agreed that they would become partners in a pet supplies business. However, they never actually conducted the business together. Instead, Cosmo operated the pet supplies business by himself and Maggie kept her job as a security guard. In order to obtain pet supplies on credit, Cosmo told the supplier that Maggie was his partner. The supplier extended credit to the business in reliance on Cosmo's statement that he and Maggie were partners. When the pet supplies business failed and Cosmo did not pay the supplier what was owed, the supplier sued both Cosmo and Maggie in effort to collect payment of the debt. Is Maggie liable to the supplier? a. Yes, because of the operation of the partnership by estoppel doctrine. b. No, because a partner is liable only for the partnership debts she actually incurs. c. Yes, because Maggie and Cosmo had agreed to become partners. d. No, because Maggie and Cosmo never operated the business together.
Answer: D [The answer is not "A" because Maggie did not say or do anything to or in front of the creditor to lead it to believe she was Cosmo's "partner"; only Cosmo did and this is not enough to trigger the partnership by estoppel doctrine. Further, the answer is not "C" because under the Uniform Partnership Agreement (UPA), agreeing to become partners is not in and of itself enough/adequate to actually legally form a partnership - again, see/read the master/study outline in your University Readers book closely!! (Note that this example relates to the partnership by estoppel example that I gave you in your University Readers book.)]
12. Mary was a limited partner in a limited partnership that had four (4) total limited partners and one (1) general partner. Mary and one other limited partner invested $40,000 each in the partnership, the other two limited partners invested $60,000 each and the general partner invested $800,000. Their written limited partnership agreement made no mention as to the sharing of profits and losses. In the first year of operations the partnership had net income of $100,000. How much should be allocated to Mary? a. $25,000. b. $20,000. c. $10,000. d. $5,000. e. $4,000.
Answer: E [Remember that in the absence of an agreement to the contrary, partners in a limited partnership share profits/losses based upon their capital contribution, not according to the number of partners - i.e., the rule for limited partnerships is not the same as for ordinary partnerships.]
10. The attributes of a limited liability partnership (LLP) are: a. A partner's liability for his partners' professional malpractice is limited to the partnership's assets. b. A partner retains unlimited personal liability for his/her own malpractice c. A partner retains unlimited personal liability for all non-professional obligations of the partnership. d. A and B only. e. A, B and C.
Answer: E [See the discussion in the master/study outline in your University Readers book on Limited Liability Partnerships.]
29. According to the study outline in your University Readers book, which of the following events causes the dissolution of a partnership? a. The admission of a new partner to the partnership. b. A partner assigning her partnership interest to a creditor. c. A creditor obtaining what is called a "charging order." d. The disagreement among the partners that does not threaten the partnership assets or profitability. e. The partnership's accomplishment of its objective.
Answer: E [See the material in the master/study outline in your University Readers book on "Dissolution" (and the causes of a non- wrongful and wrongful dissolution).]
8. Although the addition of a new limited partner does not cause a dissolution of the former limited partnership, the addition of a new general partner does have that effect.
Answer: F
16. A partner who wrongfully causes a dissolution of the partnership nevertheless remains entitled to his/her share of the goodwill of the business.
Answer: F [Again, see the discussion on "Dissolutions" in the master/study outline in your University Readers book.]
13. As a general rule, the owners of a corporation's common shares do not possess voting rights with regard to the election of corporate directors.
Answer: F [As noted in the master/study outline in your University Readers book (see discussion on common stock), common stock shareholders have the exclusive right to elect the directors who manage the corporation.]
7. In a limited partnership, a general partner's liability to partnership creditors is limited to the amount of his capital contribution.
Answer: F [False. General partners in an LP have unlimited personal liability!]
3. Although they are corporations, limited liability companies (LLCs) differ from other/regular corporations in that members of LLCs, unlike shareholders in corporations, are individually liable for LLC obligations.
Answer: F [False. LLCs are the same as regular corporations in this regard.]
1. Although a partner in an accounting firm organized as an ordinary partnership cannot be held personally liable for the negligence of another partner, such vicarious liability can be imposed on the "innocent" partner if the accounting firm is organized as a limited liability partnership (LLP).
Answer: F [He/She can be held liable in an ordinary partnership. Further, in an LLP such an innocent partner cannot be held liable for the negligence/professional malpractice of his/her partner in the LLP. See the ordinary partnership and LLP material in your University Readers book - read that material closely!!]
13. A partner's liability for partnership debts is limited to the amount of his capital contribution to the partnership.
Answer: F [He/She has unlimited personal liability for such debts!!]
7. If a partner's exercise of judgment concerning a transaction caused the partnership to experience a loss, that partner "necessarily" (i.e., automatically and always) will be liable to the partnership for the amount of the loss.
Answer: F [If the partner caused such a loss due to his negligence or intentional tort, then, of course, he would be liable to the partnership for any loss; but if that is not present or the case, then he/she would not be responsible for such loss.]
14. Either sharing profits or sharing management is, by itself, ordinarily considered conclusive evidence of a partnership.
Answer: F [It is not conclusive by itself; it's only "evidence of" a partnership. See the discussion of the UPA in the master/study outline in your University Readers book.]
24. A partner who withdraws from an existing partnership remains liable for all partnership obligations that existed as of the time of her withdrawal, but her legal liability is limited to the extent of her investment in the partnership assets.
Answer: F [Liability extends to personal unlimited liability for such debt and obligations!! It is NOT limited to just her share of the partnership assets!]
