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Chapter 32
All Forms of Partnerships
N.B.: TYPE indicates that a question is new, modified, or unchanged, as follows.
N A question new to this edition of the Test Bank.
+ A question modified from the previous edition of the Test Bank.
= A question included in the previous edition of the Test Bank.
TRUE/FALSE QUESTIONS
1. Each partner is deemed to be an agent of the other partners and of the
partnerships.
2. Federal law permits a partnership to be treated as an entity in suits in federal
courts.
3. For most purposes, the law recognizes a partnership as an independent entity.
4. A sharing of both profits and losses is the only requirement of a partnership.
5. For federal income tax purposes, a partnership is not a tax-paying entity.
2 UNIT FIVE: BUSINESS ORGANIZATIONS
6. An oral agreement to form a partnership can never be enforced.
7. A partner’s profit from a partnership is taxed as income to the firm.
8. A partnership agreement can include almost any terms that the partners wish.
9. Withdrawal from a partnership for a term prematurely does not constitute a
breach of the partnership agreement.
10. Under no circumstances can a non-partner be regarded as an agent whose
acts are binding on the partnership.
11. Partnership profits must be shared in the same proportion as the partners’
investment of capital in the firm.
12. In a general partnership, all partners have equal rights in managing the
partnership.
13. The majority rule controls decisions on ordinary matters connected with
partnership business.
14. Each partner in a partnership has the right to full and complete information
concerning the conduct of all aspects of partnership business.
15. Property acquired by the partnership is the property of the partners individually.
16. A partner is a co-owner of partnership property.
17. A partner owes to the partnership and the other partners a duty of loyalty.
18. A partner owes to the partnership and the other partners a duty of care.
19. A partner is entitled to make secret profits or put self-interest before his or her
duty to the interest of the partnership.
20. In a general partnership, the acts of one partner in the ordinary course of
business subjects both the partner and the firm to liability.
21. In a general partnership, the partners are personally liable for the debts of the
partnership.
22. A third party cannot sue one of the partners of a partnership without suing all of
the partners of the partnership.
23. A partner always has the power and the right to dissociate from the partnership.
24. A partnership ends if one partner dissociates from the firm.
25. On a partner’s dissociation, his or her duty of loyalty to the partnership ends.
26. A partner may dissociate from a partnership by declaring bankruptcy.
27. Any event that makes its unlawful for a partnership to continue its business will
result in dissolution.
28. If a partnership’s liabilities are greater than its assets, the partners bear the
losses.
29. A limited liability partnership allows its partners to avoid personal liability for the
malpractice of other partners.
30. In a limited liability partnership, a partner can be exempt from personal liability
for the malpractice of other partners.
31. In a limited partnership, a limited partner is liable for all partnership debts.
32. In a limited partnership, a limited partner has full responsibility for the
partnership and for all its debts.
33. In a limited partnership, a general partner has full responsibility for the
partnership and for all its debts.
34. An assignment of the interest of a limited partner dissolves a limited
partnership.
35. In a limited partnership, a general partner’s dissociation from the firm may lead
to dissolution.
MULTIPLE CHOICE QUESTIONS
1. Guy and Hanna do business as G-H Associates. If G-H is a partnership, it 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 in the presence of an express agreement.
d. under all circumstances.
2. Ben, who runs a livestock breeding business, owes the Circle C Ranch
$40,000. Ben agrees to pay the Circle C a percentage of his profits each month
until the debt is paid. Because of this agreement, the Circle C is
a. Ben’s creditor and partner.
b. Ben’s creditor only.
c. Ben’s partner only.
d. neither Ben’s creditor nor his partner.
3. Noah and Orin do business as Personnel Partners. In most states, for purposes
of suing and being sued, Personnel Partners would be treated as
a. an aggregate of the individual partners.
b. a natural person.
c. an entity.
d. a non-existent party.
4. Will and Jay form Northwest 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.
5. Kathy and John decide to form a partnership to sell fish food to local fish farms
for the next five years. To be enforceable under the Statute of Frauds, the
partnership agreement
a. must be signed by a notary public.
b. must be in writing.
c. must be oral.
d. cannot involve a third party.
6. 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.
7. Denise and Elke do business as Final Curtain Decorators. In most states, for
purposes of holding title to property, this partnership would be treated as
a. an aggregate of the individual partners.
b. a natural person.
c. an entity.
d. a non-existent party.
8. Sable and Rex agree while talking on the phone to form a partnership to deal in
transfers of 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 reduced to writing.
c. only if the parties exchange valid consideration.
d. without more.
9. Hollister and Gladys do business as partners in Frothy Confections. For federal
income tax purposes, Frothy Confections would be treated as
a. a pass-through entity.
b. a natural person.
c. a tax-paying entity.
d. a partnership by estoppel.
10. Tom and Bill are partners in Tough Trucks Towing. James is not a partner. In
dealing with Fred, James holds himself out to be a partner in Tough Trucks
Towing and Fred contracts to have Tough Trucks Towing tow some vehicles for
him. If Tough Trucks fails to tow the vehicles, a court may conclude that
a. a partnership by estoppel exists and James is liable to Fred.
b. no partnership exists and James is not liable to Fred.
c. a partnership by estoppel exists and Fred has all partnership rights.
d. no partnership exists, but Tom and Bill are liable to Fred.
11. Parker and Oscar sign a partnership agreement to do business as “Parker’s
Plumbing” without specifying a duration. This partnership is terminable
a. at any time by either partner.
b. only after a reasonable term.
c. only if Parker dissociates from the firm.
d. only if Oscar dissociates from the firm.
12. Sweet Selections is a general partnership that sells candy, cards and flowers.
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. To
pass a management decision
a. a majority of the partners must agree to the decision.
b. both Jill and Amy must agree to the decision.
c. Jill or Amy must agree to the decision.
d. 30 percent of the partners must agree to the decision.
13. Ryder and Sergei are partners in Timberline Gear, which sells mountain– and
rock-climbing equipment. Ryder manages the business. Unless the partnership
agreement states otherwise, Ryder is
a. entitled to compensation in proportion to his effect on the business.
b. entitled to compensation in proportion to his effort.
c. entitled to compensation in proportion to his capital contribution.
d. not entitled to compensation.
14. Cody is a partner in Delta Accounting Service. Cody can inspect
a. all of Delta’s books and records.
b. Delta’s books and records only as the firm’s management permits.
c. Delta’s books and records only for a reasonable purpose.
d. Delta’s books and records relating to Cody’s capital contribution only.
15. Mabel and Nicol do business as One World Realty. In acting on the firm’s
behalf in a deal with Property Acquisition Company, Mabel fails to account for
the profit. To her firm, Mabel is
a. liable for breach of the duty of care.
b. liable for breach of the duty of economic sense.
c. liable for breach of the duty of loyalty.
d. not liable.
16. Corbin, a partner in Doctors Medical Clinic, applies for a loan with Evermore
Bank allegedly on Doctors’ behalf but without the authorization of the other
partners. Evermore knows that Corbin is not authorized to take out the loan.
Corbin defaults on the loan. Liability for its unpaid amount is imposed on
a. Corbin and Doctors, jointly.
b. Corbin only.
c. Doctors only.
d. Evermore only.
17. Tundi is a partner in YooHoo! Amusement, a new partnership. A YooHoo! debt
comes due. Tundi is
a. not liable for the debt.
b. only liable for the debt up to the amount of his capital contribution.
c. personally liable only to the extent the other partners do not pay.
d. personally liable to the full extent of the debt.
18. Fay is admitted to Global Associates, an existing partnership. A partnership
debt incurred before the date of her admission comes due. Fay is
a. not liable for the debt.
b. only liable for the debt up to the amount of his capital contribution.
c. personally liable only to the extent the other partners do not pay.
d. personally liable to the full extent of the debt.
19. Clu, Dolf, and Elton do business as Fertile Valley Farm. Clu’s relationship to the
firm ends, but it continues to do business. This is
a. dissociation.
b. dissolution.
c. winding up.
d. wrongful.
CHAPTER 32: ALL FORMS OF PARTNERSHIP 13
Fact Pattern 32-1 (Questions 20–22 apply)
Brad, Carlos, and Dora are general partners in Eastside Physicians, a medical clinic.
20. Refer to Fact Pattern 32-1. Brad, Carlos, and Dora decide to admit Faisal as a
new partner in Eastside Physicians. Faisal’s liability for partnership debts
incurred before his admission is
a. limited to his capital contribution to the firm.
b. limited to his personal assets.
c. nothing.
d. unlimited.
21. Refer to Fact Pattern 32-1. 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.
22. Refer to Fact Pattern 32-1. The partners decide to dissolve Eastside. Dora
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.
23. Doral, Esteban, and Fiona are general partners in Centreville Dentistry, a
dental clinic. Their agreement states 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. Doral’s assignment of his interest in the clinic to Hometown Lenders
results in
a. nothing with respect to Doral or the clinic.
b. the automatic termination of the clinic’s legal existence.
c. Doral’s liability for all of the clinic’s debts.
d. Doral’s wrongful dissociation and liability for any damages.
24. Edgar, Jon and Phoebe do business as Reliable Movers. Phoebe develops a
debilitating illness and can no longer work. Phoebe
a. may dissociate from the partnership.
b. may not dissociate from the partnership without Edgar and Jon’s
consent.
c. must pay damages to Edgar and Jon for the loss of her work.
d. may terminate the partnership.
25. Jim and Kyle are partners in J&K Sales, which exports technical equipment
under a three-year partnership agreement. The U.S. government declares that
the equipment can no longer be exported. J&K
a. dissolves as soon as the stated term expires.
b. dissolves as soon as the partners agree to dissolve it.
c. dissolves immediately unless the partners change its business.
d. does not dissolve.
26. Mead, Nero, and Olen do business as Pipe & Plumbing Services. After Mead’s
relationship to the firm ends, Nero and Olen agree to discontinue the business.
This is
a. dissociation.
b. dissolution.
c. gross negligence.
d. simple misconduct.
27. Kelly, Lars, and Mona agree to be partners in Neighborhood Delivery Service
(NDS), splitting the profits equally. Kelly contributes 67 percent of the capital.
When NDS 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. Kelly because she contributed most of the capital.
d. Lars and Mona because they contributed the least of the capital.
28. Newt is considering forms of business organization for Newton Design, an ar–
chitectural firm. An advantage of a limited liability partnership is that partners
can avoid personal liability for
a. their own wrongful acts.
b. only other partners’ malpractice.
c. only partnership obligations that exceed capital contributions.
d. only partnership obligations that fall within capital contributions.
29. Jack and Kyra are partners in Law Firm, LLP, a limited liability partnership. Jack
supervises Kyra, who negligently fails to appear in court on behalf of Milo, a
client. Liability to Milo rests with
a. Jack and Kyra.
b. Jack only.
c. Kyra only.
d. neither Jack nor Kyra.
30. Fern and Gray want to form a limited partnership to manage two restaurants:
Café Latte and Deli Delite. In most states, a limited partnership will be created
when
a. a certificate of limited partnership is filed.
b. a partnership agreement is executed.
c. the business for which the firm is formed actually begins.
d. the partners make their capital contributions.
31. Rick and Sandy are limited partners in Total Profit Enterprises, a limited part–
nership. To avoid personal liability for partnership obligations, they must not
a. acquire an interest in the firm.
b. contribute property to the firm.
c. engage in activities independent of the firm’s business.
d. participate in the firm’s management.
32. Lucy is a limited partner in Metro Contractors, a limited partnership, which
cannot pay its debts. Lucy is personally 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.
d. to the full extent.
33. Venture Capital, LP, is a limited partnership. Its limited partners include more
than 150 sophisticated investors and investment professionals. A Venture
limited partner loses his or her limited liability if he or she
a. acts as the firm’s manager.
b. does not participate in the firm’s management.
c. invests in Unified Fund, one of Venture’s competitors.
d. votes on the firm’s sale or dissolution.
34. Energy Unlimited, LP, is a limited partnership to which its partners, including
Fink, have contributed capital. Energy’s creditors include Graves Engineering,
Inc. On Energy’s dissolution, its assets will be distributed to pay
a. Fink and Graves proportionately.
b. Fink first.
c. Graves first.
d. neither Fink nor Graves.
35. Connie, Drew, and Ellen are the general partners of Foreign Auto Repair, a lim–
ited partnership. Connie dies. The partnership can
a. continue only after a distribution of its assets.
b. continue only as a general partnership.
c. continue only if Drew and Ellen consent.
d. not continue because Connie’s death dissolves the firm.
ESSAY QUESTIONS
1. Sally and Tom decide to go into business, selling discounted merchandise
through their Web site “e–Buy.” They sign a partnership agreement that requires
Sally to contribute $12,000 and Tom to contribute $8,000 in capital to start the
firm. The agreement also states that only Sally will have the authority to bind
the partnership in deals with third parties, but the agreement says nothing
about the management of the firm or a division of profits. Without Sally’s
knowledge, Tom tells United Computer Products, Inc., that he represents the
firm and signs a contract with United to buy hard drives for resale on e-Buy. In
the first year, e-Buy makes a profit of $50,000. What are the partners’ rights
with respect to the management of the firm? Is the partnership bound to the
contract with United? Do the partners split the first year’s profits? If so, how
much is each entitled to?
2. International Exports, L.P., is a limited partnership, with $100,000 in declared
but unpaid profits. International’s creditors include Friendly Credit Corporation
CHAPTER 32: ALL FORMS OF PARTNERSHIP 19
for $5,000 and Gwen, one of International’s limited partners, also for $5,000.
When Harry, one of International’s general partners, decides to retire, the other
general partners vote to liquidate and dissolve the firm. The limited partners,
who are not asked their opinions, want International to continue in business and
file a suit against the general partners to compel this result. Can the court order
International to continue? If not, what is the priority of the distribution of
International’s assets on its dissolution?