453
Chapter 37
Partnerships and
Limited Liability 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
A1. An association cannot be a partnership without an express agreement.
A2. The Uniform Partnership Act governs the operation of partnerships.
A3. A sharing of profits from the ownership of property creates a presumption that a
partnership exists.
A4. Federal law permits a partnership to be treated as an entity in suits in federal courts.
454 TEST BANK A—UNIT EIGHT: BUSINESS ORGANIZATIONS
A5. A partner’s profit from a partnership is taxed as income to the firm.
A6. Withdrawal from a partnership for a term prematurely does not constitute a breach of
the partnership agreement.
A7. In a general partnership, all partners have equal rights in managing the partnership.
A8. Under no circumstances can a non-partner be regarded as an agent whose acts are
binding on the partnership.
A9. A partner owes to the partnership and the other partners a duty of loyalty.
A10. A partner who pursues his or her own interests automatically violates the partner’s
fiduciary duties to the partnership.
A11. In a general partnership, the partners are personally liable for the debts of the
partnership.
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A12. A partner always has the power and the right to dissociate from the partnership.
A13. On a partner’s dissociation, his or her duty of loyalty to the partnership ends.
A14. Any event that makes its unlawful for a partnership to continue its business will result
in dissolution.
A15. A limited liability partnership allows its partners to avoid personal liability for the
malpractice of other partners.
A16. In a limited partnership, a limited partner has full responsibility for the partnership
and for all its debts.
A17. In a limited partnership, with the exception of the right to participate in management,
limited partners have essentially the same rights as general partners.
A18. Some states have passed laws prohibiting the withdrawal of limited partners from a
limited partnership.
A19. An assignment of the interest of a limited partner dissolves a limited partnership.
456 TEST BANK A—UNIT EIGHT: BUSINESS ORGANIZATIONS
A20. In a limited liability limited partnership, the liability of a general partner is limited to
the amount of capital he or she has invested in the partnership.
MULTIPLE CHOICE QUESTIONS
A1. 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.
A2. Noah and Orin do business as Pest Control Partners. In most states, for the purposes
of suing and being sued, Pest Control Partners would be treated as
a. an aggregate of the individual partners.
b. a natural person.
c. an entity.
d. a non-existent party.
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Fact Pattern 37–1A (Questions A3–A4 apply)
Desi starts up eSites, an Internet service, and leases office space in a building owned by Fred.
The lease requires Desi to pay Fred a base rental of $1,250, plus 10 percent of eSites’ profits,
each month. The term is two years. Desi hires Gwen to work at eSites’ tech support desk at
an hourly wage of $12.50, plus a commission of 10 percent of the profits. The term is also two
years.
A3. Refer to Fact Pattern 37-1A. Desi and Fred are
a. not partners, because Fred does not have an ownership interest or manage–
ment rights in eSites.
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.
A4. Refer to Fact Pattern 37-1A. Desi and Gwen are
a. not partners, because Gwen does not have an ownership interest or manage–
ment rights in eSites.
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 for two years.
A5. 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.
458 TEST BANK A—UNIT EIGHT: BUSINESS ORGANIZATIONS
A6. Rona and Savannah do business as Treasure Island Traders. In acting on the firm’s
behalf in a deal with Unlimited Potential, Inc., Rona makes an honest error in
overestimating the profit. To her firm, Rona 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.
A7. Megan and Nicole do business as One World Realty. In acting on the firm’s behalf in a
deal with Property Acquisition Company, Megan fails to account for the profit. To her
firm, Megan 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.
A8. 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.
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Fact Pattern 37–2A (Questions A9–A10 apply)
Luann and Mace are partners in Networx, a computer peripherals firm.
A9. Refer to Fact Pattern 37-2A. Luann signs a contract with Oleo Chips, a retail component
supplier, apparently on Networx’s behalf. The contract is binding on
a. Luann, Mace, and Networx.
b. Luann only.
c. Networx only.
d. Oleo only.
A10. Refer to Fact Pattern 37-2A. Mace dissociates from Networx. Luann signs a contract with
Physik Drives, a wholesale component supplier, apparently on Networx’s behalf. Physik
does not know of Mace’s dissociation. The contract is binding on
a. Luann, Mace, and Networx.
b. Luann only.
c. Networx only.
d. Physik only.
A11. 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 her 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.
460 TEST BANK A—UNIT EIGHT: BUSINESS ORGANIZATIONS
A12. 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.
A13. Hud and Iggy form Jerry-Bilt Construction to enter into a contract to build one bridge.
Under their partnership agreement, Jerry-Bilt is to dissolve when the bridge is built. Iggy
signs a contract for the firm to build a second bridge. Jerry-Bilt
a. dissolves as soon as the first bridge is built.
b. dissolves as soon as the second bridge is built.
c. dissolves immediately on Iggy’s signing of the second contract.
d. does not dissolve.
A14. 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.
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A15. Vasili is considering forms of business organization for Vasili’s Designs, an ar–
chitectural firm. An advantage of a limited liability partnership is that partners may be
able to avoid personal liability for
a. any partnership obligation.
b. only other partners’ wrongdoing.
c. only partnership obligations that exceed capital contributions.
d. only partnership obligations that fall within capital contributions.
A16. 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.
A17. 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 opens its doors.
d. the partners make their capital contributions.
462 TEST BANK A—UNIT EIGHT: BUSINESS ORGANIZATIONS
A18. 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.
A19. 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.
A20. 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.
ESSAY QUESTIONS
A1. 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
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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?
A2. International Exports, L.P., is a limited partnership, with $100,000 in declared but
unpaid profits. International’s creditors include Friendly Credit Corporation 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?
464 TEST BANK A—UNIT EIGHT: BUSINESS ORGANIZATIONS