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
B1. Each partner is deemed to be an agent of the other partners and of the partnerships.
B2. For most purposes, most states treat a partnership as an aggregate of its members.
B3. Joint ownership of property does not in and of itself creates a partnership.
B4. A partnership agreement can include almost any terms that the partners wish.
B5. If the partnership agreement does not apportion profits, profits are shared in the
same proportion as a partner’s investment of capital in the firm.
B6. The majority rule controls decisions on ordinary matters connected with partnership
business.
B7. Property acquired by the partnership is the property of the partners individually.
B8. Devoting time, energy, and skill to partnership business is a partner’s duty and a
compensable service.
B9. A partner owes to the partnership and the other partners a duty of care.
B10. A partner is entitled to make secret profits or put self-interest before his or her duty
to the interest of the partnership.
B11. In a general partnership, the acts of one partner in the ordinary course of business
subjects the other partners to personal liability.
B12. A partnership ends if one partner dissociates from the firm.
B13. On a partner’s dissociation, his or her duty of care to the partnership ends with
respect to events that occurred before the dissociation.
B14. If a partnership’s liabilities are greater than its assets, the partners bear the losses.
B15. A limited liability partnership may exempt its partners from personal liability for any
partnership obligation.
B16. In a limited partnership, a general partner has full responsibility for the partnership
and for all its debts.
B17. In a limited partnership, limited partners have essentially the same right as general
partners to participate in management.
B18. In a limited partnership, a general partner’s dissociation from the firm may lead to
dissolution.
B19. Some states have passed laws prohibiting the withdrawal of general partners from a
limited partnership.
B20. In a limited liability limited partnership, the liability of a general partner is the same as
the liability of a limited partner.
MULTIPLE CHOICE QUESTIONS
B1. 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.
B2. 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.
B3. Bo and Clancy decide to do business as Deck & Patio Awnings. 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.
B4. 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.
B5. 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.
B6. Cody is a partner in Derivative Investment Service (DIS). Cody can inspect
a. all of DIS’s books and records.
b. DIS’s books and records only as the firm’s management permits.
c. DIS’s books and records only for a reasonable purpose.
d. DIS’s books and records relating to Cody’s capital contribution only.
B7. 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.
B8. Trina and Uri do business as Value Gems. In acting on the firm’s behalf in a deal with
World Diamond Exchange, Trina recklessly exceeds what Value Gems can afford to
pay, causing damage to the firm. Trina 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.
B9. 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.
Fact Pattern 37-1B (Questions B10–B13 apply)
Brad, Carlos, and Dora are general partners in Eastside Physicians, a medical 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.
B10. Refer to Fact Pattern 37-1B. Carlos’s assignment of his interest in Eastside to General
Credit Corporation results in
a. nothing with respect to Carlos or Eastside.
b. the automatic termination of Eastside’s legal existence.
c. Carlos’s liability for all of Eastside’s debts.
d. Carlos’s wrongful dissociation and liability for any damages.
B11. Refer to Fact Pattern 37-1B. 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.
B12. Refer to Fact Pattern 37-1B. 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.
B13. Refer to Fact Pattern 37-1B. 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.
B14. Mead, Nero, and Olen do business as Pipe & Stream Irrigation 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.
B15. Free Range Western Ranch is a family limited liability partnership. All of the partners
must be
a. natural persons only.
b. natural persons or persons acting as fiduciaries for natural persons.
c. persons acting as fiduciaries for natural persons only.
d. related.
B16. Rick and Sandy are limited partners in Total Profit Enterprises, a limited partnership.
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.
B17. Dunn and Etta are limited partners in Fancee Fashion Stores, a limited partnership. In
terms of the firm’s books, Dunn and Etta 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. total access.
B18. Genetic Innovations, LP, is a limited partnership. The partners sign an agreement
purporting to state how the firm’s profits and losses are to be divided. The profits and
losses of the firm will be divided
a. according to the agreement.
b. equally, despite the agreement.
c. in proportion to capital contributions, despite the agreement.
d. in proportion to each partner’s participation in the firm’s management,
despite the agreement.
B19. Connie, Drew, and Ellen are the general partners of Foreign Auto Repair, a limited
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.
B20. Bret is a general partner in Capitol Realty, LLLP, a limited liability limited partnership,
which cannot pay its debts. Bret 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 his capital contribution.
d. to the full extent.
ESSAY QUESTIONS
B1. Irwin was the manager of Highlights Grill, a sports bar and restaurant. Irwin opened a
bank account in Highlights’s name, signing the account signature card as “owner.”
Jody, who was often at Highlights and had free access to its office, told others that she
was “an owner” and “a partner.” She also opened a bank account in Highlights’s
name, and signed the account signature card as “owner.” Irwin told Kelton, the owner
of Natural Cheeses, Inc., that Jody was a member of a partnership that owned
Highlights. On this basis, Natural Cheeses delivered its goods to Highlights on credit. In
fact, Highlights was owned by a corporation. When the unpaid account totaled more
than $10,000, Natural Cheeses filed a suit against Jody to collect. On what basis might
Jody be liable for the debt?
B2. Dill and Edy form a partnership. Edy’s capital contribution is $10,000, and Dill’s is
$15,000. The partnership agreement provides that profits are to be shared, with 40
percent for Edy and 60 percent for Dill. Later, Edy 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?