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Chapter 31
Indicate whether the statement is true or false.
1. Unlike most agents, each partner in a partnership has an ownership interest in the business. a. True b. False
2. A sharing of profits from a business creates a presumption that a partnership exists. a. True b. False
3. The intent to associate is a key element of a partnership. a. True b. False
4. Most states treat a partnership as an aggregate for most purposes. a. True b. False
5. A majority of the states treat a partnership as an entity for most purposes. a. True b. False
6. A partner’s profit from a partnership is taxed as income to the firm. a. True b. False
7. The Uniform Partnership Act governs the operation of partnerships. a. True b. False
8. If no fixed duration of the partnership is specified, the partnership is a partnership at will, which means that it cannot be dissolved. a. True b. False
9. Under some circumstances a non-partner can be regarded as an agent whose acts are binding on the partnership. a. True b. False
10. A partnership is a pass-through entity and a taxpaying entity. a. True b. False
11. A partner has a duty to devote time, skill and energy on behalf of the partnership business. a. True b. FalseCopyright Cengage Learning. Powered by Cognero. Page 1
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12. A partner’s devoting time, energy, and skill to partnership business is a compensable service. a. True b. False
13. In a general partnership, the senior partner manages the partnership. a. True b. False
14. In a general partnership, the senior partner controls decisions on ordinary matters connected with partnership business. a. True b. False
15. A partner may pursue his or her own interests without automatically violating the partner’s fiduciary duties to the partnership and the other partners. a. True b. False
16. Limits on a partner’s authority normally are effective only with respect to third parties who are notified of the limitation. a. True b. False
17. In a general partnership, the acts of one partner in the ordinary course of business do not subject the other partners to personal liability. a. True b. False
18. A third party can sue one of the partners of a partnership without suing all members of the partnership. a. True b. False
19. A partner is liable for honest errors in judgment in conducting partnership business. a. True b. False
20. A partner always has the power but he or she may not have the right to dissociate from the partnership. a. True b. False
21. Withdrawal from a partnership before the end of its express term constitutes a breach of the partnership agreement. a. True b. False
22. A partnership is forced to terminate every time a partner dissociates from the firm. a. True
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b. False
23. On a partner’s dissociation, his or her right to participate in the management and conduct of the business terminates. a. True b. False
24. Dissociation normally entitles the partner to buy his or her interest from the partnership. a. True b. False
25. For two years after a partner dissociates from a continuing partnership, the partnership may be bound by the acts of the dissociated partner based on apparent authority. a. True b. False
26. On dissolution, the creditors of the partnership, but not the creditors of the individual partners, can make claims on the partnership’s assets. a. True b. False
27. In winding up a general partnership, creditors are paid before partners receive their capital contributions. a. True b. False
28. A limited liability partnership must be formed in compliance with state statutes. a. True b. False
29. Generally, each state limits the liability of partners in a limited liability partnership in some way. a. True b. False
30. In a limited partnership, no partner has full responsibility for the partnership and for all its debts. a. True b. False
31. In a limited partnership, limited partners have essentially the same rights as general partners to participate in management. a. True b. False
32. Some states have passed laws prohibiting the withdrawal of limited partners from a limited partnership. a. True b. False
33. In a limited partnership, a general partner’s dissociation from the firm normally will lead to dissolution unless all
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partners agree to continue the business. a. True b. False
34. A limited partnership cannot be dissolved by court decree. a. True b. False
35. The death of a limited partner dissolves a limited partnership. a. True b. False
Indicate the answer choice that best completes the statement or answers the question.
Abby starts up Bowls Bistro to serve and sell soups for workday lunches. Abby leases space in an office building owned by Carmen. The lease requires Abby to pay Carmen a base rental of $1,250, plus 10 percent of Bowls Bistro’s profits, each month. The term is two years. Abby hires Devin to take and fill customers’ orders at an hourly wage of $15.00, plus tips.
36. Abby and Carmen are a. not partners, because Carmen does not have an ownership interest or management rights in Bowls
Bistro. b. not partners, because the lease includes a “base rental.” c. not partners, because the rent includes only 10 percent of the profits. d. partners in a partnership for two years.
37. Abby and Devin are a. not partners, because Devin does not have an ownership interest or management rights in Bowls
Bistro. b. not partners, because the pay includes an hourly wage. c. not partners, because the pay includes only 10 percent of the profits. d. partners in a partnership.
38. Ralph and Simone do business as Tech Troubleshooters, a partnership. In most states, for the purposes of collecting judgments and having accounting performed, Tech Troubleshooters would be treated as a. an aggregate of individuals. b. a person. c. an entity. d. a non-entity.
39. Luke and Maya form Northeast Air Express, a general partnership. The essential elements of this partnership do not include a. a sharing of profits and losses. b. a joint ownership of the business. c. an equal right to management in the business. d. goodwill.
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40. Gwen and Hugo do business as Gwen & Hugo Civil Engineers, a partnership. This firm is governed by the Uniform Partnership Act a. in the absence of an express agreement. b. in the absence of an implied agreement. c. only under an express agreement. d. under all circumstances.
41. Stefani and Tyler agree in an exchange of e-mail to form a partnership to buy and sell real property. Their partnership agreement is legally binding a. only if a copy of the agreement is filed in the appropriate state office. b. only if the agreement is printed in hard copy and signed by the
parties. c. only if the parties exchange valid consideration. d. without more.
42. Sara and Tony agree while talking on the phone to form a partnership—United Caretakers—to enter into the business of real property management. To be enforceable under the Statute of Frauds, their agreement must a. be filed in the appropriate state office. b. be in writing. c. be signed by a notary public. d. not involve a third party.
43. Bo and Clancy decide to do business as Marketing & Promotion Services. To be a partnership, this association can result from an agreement that is a. express, but not from an agreement that is implied. b. implied, but not from an agreement that is express. c. oral, written, or implied by conduct. d. written, but not from an agreement that is oral or
implied.
44. Sweet Selections, a general partnership, operates as a gift shop. Sweet Selections has ten partners. Jill and Amy each have a 25 percent interest in the partnership. All the other members have a 10 percent interest. With respect to management decisions a. a majority of the partners must agree. b. both Jill and Amy must agree. c. the senior partner decides. d. 30 percent of the partners must
agree.
45. Quisa and Reilly are partners in Sport Bikes, which rents and sells bikes, bike accessories, and related gear. Quisa manages the business. Unless the partnership agreement states otherwise, Quisa is a. entitled to compensation in proportion to her effect on the
business. b. entitled to compensation in proportion to her effort. c. entitled to compensation in proportion to her capital contribution. d. not entitled to compensation.Copyright Cengage Learning. Powered by Cognero. Page 5
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46. Chet is a partner in Diligent Accounting Service. Chet can inspect Diligent’s books and records a. in their entirety. b. only as the firm’s management permits. c. only for a reasonable purpose. d. only in relation to Chet’s capital contribution.
47. Rosalee is a partner in Silver Dragon, a partnership consisting of the owners of a Chinese and American restaurant. Silver Dragon incurs debt for new dining tables and chairs. With respect to this debt, Rosalee is a. not liable. b. only liable to the amount of her capital contribution. c. only liable in proportion to the number of partners in the firm. d. personally liable to the full extent.
48. Blythe and Cali do business as Diamond Investments. In acting on the firm’s behalf, Blythe makes an honest error in overestimating the value of a particular stock purchase. To her firm, Blythe is a. liable for breach of the duty of care. b. liable for breach of the duty of accounting. c. liable for breach of the duty of accounting. d. not liable.
Kristin and Lindsey are partners in Mobile Devise, an online marketing firm.
49. Kristin signs a contract with Nature’s Best Chocolate, a candy maker and seller, apparently on Mobile’s behalf. The contract is binding on a. Kristin, Lindsey, and Mobile. b. Kristin only. c. Mobile only. d. Nature’s Best only.
50. Lindsey dissociates from Mobile. Kristin signs a contract with Organic Olives, a food seller, apparently on Mobile’s behalf. Organic Olives does not know of Lindsey’s dissociation. The contract is binding on a. Kristin, Lindsey, and Mobile. b. Kristin only. c. Mobile only. d. Organic Olives only.
51. Emily is one of three partners in Fast Work, a commercial janitorial service. With respect to Emily’s interest in the firm, when she dies, her heirs are most likely entitled to a. nothing. b. a payout of Emily’s capital contribution without
more. c. the buyout price paid by the firm for the interest. d. one-third of the value of the interest.
52. Erwin, a partner in Farm Equipment Rentals & Sales, applies for a loan with Garden Valley Bank allegedly on Farm Copyright Cengage Learning. Powered by Cognero. Page 6
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Equipment’s behalf but without the authorization of the other partners. The bank knows that Erwin is not authorized to take out the loan. Liability in the event of default will be imposed on a. none of the choices. b. Erwin. c. Farm Equipment. d. Garden Valley Bank.
53. Nora and Owen do business as Profit & Property, a real estate investment partnership. In acting on the firm’s behalf in a deal with Quaint Village Mall, Nora takes advantage of an opportunity to make a secret profit on her own behalf. To her firm, Nora is liable for a. breach of the duty of care. b. breach of contract. c. breach of contract. d. nothing.
Bryn, Cornell, and Duke are general partners in Equity Lending, a consumer credit, mortgage, and investment firm. Their agreement states that it is a breach of the agreement for any partner to assign his or her interest to a creditor without the consent of the other partners.
54. Bryn, Cornell, and Duke decide to admit Giselle as a new partner in Equity Lending. Giselle’s liability for partnership debts incurred before her admission is a. limited to her capital contribution to the firm. b. limited to her personal assets. c. nothing. d. unlimited.
55. Cornell’s assignment of his interest in Equity Lending to Financial Consultants Corporation results in a. nothing with respect to Cornell or Equity Lending. b. the automatic termination of Equity Lending’s legal existence. c. Cornell’s liability for all of Equity Lending’s debts. d. Cornell’s wrongful dissociation and liability for any damages.
56. The partners decide to dissolve Equity Lending. Duke collects and distributes the firm’s assets. This results in a. nothing with respect to the firm’s existence. b. the continuation of the firm’s business. c. the termination of the firm’s legal existence. d. the temporary suspension of the firm’s business.
57. Oliana is a partner in Pacific Traders. In the majority of states, with respect to any partnership obligations that Oliana does not participate in, know about, or ratify, Oliana would be liable for a. none of the obligations. b. all of the obligations, jointly and severally. c. all of the obligations, jointly but not
severally. d. only the contractual obligations.
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58. Craig, Donna, and Eve do business as FastTrak Career Consultants. Eve’s relationship to FasTrak ends, but the firm continues to do business. This is a. dissociation. b. dissolution. c. disestablishment. d. disrespectful.
59. Brad and Carolyn are partners in Doctors for Children, a medical clinic. Brad’s dissociation from the firm results in a. the automatic termination of the firm’s legal existence. b. the partnership’s buyout of Brad’s interest in the firm. c. the immediate maturity of all partnership debts. d. the temporary suspension of the partnership’s
business.
60. Jim and Kyle are partners in J&K Sales, which exports technical equipment under a three-year partnership agreement. One year into the term, Congress declares that the equipment can no longer be exported. J&K a. can continue its business until the end of the three-year term. b. can continue its business indefinitely. c. dissolves immediately unless the partners change its business. d. is immediately subject to criminal prosecution and penalties.
61. Colin, Demi, and Erin agree to be partners in Fajita Pizza, splitting the profits equally. Colin contributes 65 percent of the capital. When Fajita Pizza is dissolved, its liabilities are greater than its assets. The losses are paid by a. all of the partners in proportion to their capital contributions. b. all of the partners in proportion to their shares of the profits. c. Colin because he contributed most of the capital. d. Demi and Erin because they contributed the least of the
capital.
62. Nell is considering forms of business organization for Optic Center, a medical eye clinic. An advantage of a limited liability partnership is that, depending on the applicable state statute, partners can avoid personal liability for a. their own wrongful acts. b. any partnership obligation. c. their own and other partners’ wrongful acts. d. none of the choices.
63. Smith & Jones, Accountants, is a limited liability partnership (LLP). The major features of an LLP are that it limits the personal liability of the partners and a. it allows the partnership to continue as a pass-through tax
entity. b. LLP statutes do not vary from state to state. c. it can only do business in the state in which it was formed. d. only a few states have enacted LLP statutes.
64. Roma and Swain are partners in Roma & Swain Attorneys, LLP, a limited liability partnership. Roma supervises their firm’s associate Taylor, who negligently fails to appear in court on behalf of Umberto, a client. Liability to Umberto rests Copyright Cengage Learning. Powered by Cognero. Page 8
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only with a. Roma and Taylor. b. Roma. c. Taylor. d. Roma and Swain.
65. Delany and Efron want to form a limited partnership to do general business bookkeeping with an emphasis on tax accounting. In most states, a limited partnership will be created when Delaney and Efron a. file a certificate of limited partnership. b. execute a partnership agreement. c. accept their first client. d. make their capital contributions.
66. Narib and Olivia are limited partners in Physicians Medical Center, a limited partnership. In terms of the firm’s books and information regarding partnership business, Narib and Olivia are entitled to a. access in proportion to their participation in management of the
firm. b. access to the parts that directly relate to their capital contributions. c. no access. d. complete access
67. Debra is a limited partner in Eco Baits, a pest control service organized as a limited partnership, which cannot pay its debts. Debra is liable for the debts a. in proportion to the number of partners in the firm. b. to no extent. c. to the extent of her capital contribution to the firm. d. to the full extent.
68. Cherry Creek Development, LP, is a limited partnership that invests in residential real estate projects. Its limited partners include more than 150 sophisticated investors and investment professionals. A Cherry Creek limited partner loses his or her limited liability if he or she a. participates in the firm’s management. b. does not participate in the firm’s management. c. invests in a project that Cherry Creek has declined. d. votes to sell or dissolve the firm.
69. Orlando is a limited partner in Port of Call Exports, a limited partnership. By participating in the firm’s management, Orlando is liable for its obligations a. in proportion to the number of partners in the firm. b. to no extent. c. to the extent of his capital contribution to the firm. d. to the full extent.
70. Natural Gas, LP, is a limited partnership to which its partners have contributed capital. Natural Gas’s creditors include Precision Piping, Inc. On Natural Gas’s dissolution, its assets will be distributed to pay
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a. the partners and Precision Piping proportionately. b. the partners before Precision Piping. c. Precision Piping before the partners. d. none of the choices.
71. Sebastian was the manager of Thai Bistro, a restaurant specializing in Southeast Asian foods. Sebastian opened a bank account in Thai Bistro’s name, signing the account signature card as “owner.” Umeko, who was often at Thai Bistro and had free access to its office, told others that she was “an owner” and “a partner.” She also opened a bank account in Thai Bistro’s name, and signed the account signature card as “owner.” Sebastian told Vijay, the owner of Wong Noodles, Inc., that Umeko was a member of a partnership that owned Thai Bistro. On this basis, Wong Noodles delivered its goods to Thai Bistro on credit. In fact, Thai Bistro was owned by a corporation. When the unpaid account totaled more than $10,000, Wong Noodles filed a suit against Umeko to collect. On what basis might Umeko be liable for the debt?
72. Fresco and Garcia form a partnership—HVAC Pros. Garcia’s capital contribution is $10,000, and Fresco’s is $15,000. The partnership agreement provides that profits are to be shared, with 40 percent for Garcia and 60 percent for Fresco. Later, Garcia makes a $10,000 loan to the partnership when it needs working capital. When the partnership is dissolved, its assets are $50,000, and its debts are $8,000. How should the assets be distributed?
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Answer Key
1. True
2. True
3. True
4. False
5. True
6. False
7. True
8. False
9. True
10. False
11. True
12. False
13. False
14. False
15. True
16. True
17. False
18. True
19. False
20. True
21. True
22. False
23. True
24. True
25. True
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26. False
27. True
28. True
29. True
30. False
31. False
32. True
33. True
34. False
35. False
36. a
37. a
38. c
39. d
40. a
41. d
42. b
43. c
44. a
45. d
46. a
47. d
48. d
49. a
50. a
51. cCopyright Cengage Learning. Powered by Cognero. Page 12
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52. b
53. c
54. a
55. d
56. c
57. b
58. a
59. b
60. c
61. b
62. b
63. a
64. a
65. a
66. d
67. c
68. a
69. d
70. c
71. The theory under which Umeko would most likely be liable for Thai Bistro’s debt to Wong Noodles is partnership by estoppel.The first requirement of this theory is a representation, by a nonpartner or by another with the nonpartner’s consent, that the non-partner is a partner. The second requirement is reliance on that representation.In this case, Wong Noodles could prove both elements. Both Sebastian and Umeko made representations with respect to Umeko’s status in relation to Thai Bistro—they both signed bank cards as “owner,” Umeko was often at Thai Bistro and had free access to its office, Umeko told others that she was a “partner” in the business, which is what Sebastian also told Vijay. As for the reliance element, Wong Noodles extended credit to Thai Bistro only because Wong Noodles believed that Thai Bistro was owned by a partnership.
72. On the dissolution and winding up of a partnership, the order of liability payment of the assets is as follows: (a) debts Copyright Cengage Learning. Powered by Cognero. Page 13
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owed to partnership creditors, including partners; and (b) capital contributions of partners and profits as provided or, in the absence of an agreement, equally [UPA 807].In this question, the partnership’s creditors would be paid $8,000 first, leaving a balance of $42,000 from the $50,000. Next, Garcia would be paid $10,000 for the loan, or advance, leaving $32,000. From this amount, Garcia would receive $10,000 and Fresco $15,000 as payment for their capital contributions, leaving a balance of $7,000. The $7,000 would be split as profits, with 40 percent going to Garcia ($2,800) and 60 percent to Fresco ($4,200).
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