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1
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. No partner is deemed to be an agent of the other partners and of the
partnership.
B2. A majority of the states treat a partnership as an entity for most purposes.
B3. The intent to associate is a key element of a partnership.
B4. One can join a partnership even if all other partners do not consent.
2 TEST BANK B—UNIT EIGHT: BUSINESS ORGANIZATIONS
B5. The partnership is a pass-through entity and a taxpaying entity.
B6. If no fixed duration of the partnership is specified, the partnership is a
partnership in perpetuity, which means that the partnership cannot be
dissolved.
B7. The majority rule controls decisions that significantly affect the nature of the
partnership or that are outside the ordinary course of the partnership business.
B8. Devoting time, energy, and skill to partnership business is a partner’s duty and
is not a compensable service.
B9. Every act of the partner concerning partnership business and “business of the
kind” and every contract signed in the partnership’s name bind the partner, but
not the firm.
B10. A partner may pursue his or her own interests without automatically violating
the partner’s fiduciary duties to the partnership and the other partners.
B11. Limits on a partner’s authority normally are effective only with respect to third
parties who are notified of the limitation.
CHAPTER 37: PARTNERSHIPS AND LIMITED LIABILITY PARTNERSHIPS 3
B12. Dissociation normally entitles the partner to buy his or her interest from the
partnership.
B13. On a partner’s dissociation, the partner’s duty of loyalty ends.
B14. After a partner dissociates from a continuing partnership, the partnership is no
longer bound by the acts of the dissociated partner, even on a theory of
apparent authority.
B15. On dissolution, the creditors of the partnership, but not the creditors of the
individual partners, can make claims on the partnership’s assets.
B16. A limited liability partnership may exempt its partners from personal liability for
any partnership obligation.
B17. In a limited partnership, a limited partner has full responsibility for the
partnership and for all its debts.
B18. In a limited partnership, a general partner’s dissociation from the firm normally
will lead to dissolution unless all partners agree to continue the business.
B19. A limited partnership cannot be dissolved by court decree.
4 TEST BANK B—UNIT EIGHT: BUSINESS ORGANIZATIONS
B20. A limited liability limited partnership is a type of limited partnership.
MULTIPLE CHOICE QUESTIONS
B1. Noah and Orin do business as Personnel Providers, an employment agency. In
most states, for purposes of suing and being sued, Personnel Providers, which
is a 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. Luke and Maya 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.
B3. Pualani and Quentin do business as partners in Rio Vista Builders, a residential
construction firm. For federal income tax purposes, Rio Vista would be treated
as
a. a pass-through entity.
b. a natural person.
c. a tax-paying entity.
d. a partnership by estoppel.
CHAPTER 37: PARTNERSHIPS AND LIMITED LIABILITY PARTNERSHIPS 5
B4. Sable and Rex agree while talking on the phone to form a partnership—The
Home Source—to deal in transfers of real property. To be enforceable, their
agreement must
a. be filed in the appropriate state office.
b. be in writing.
c. involve the exchange of valid consideration.
d. not involve a third party.
B5. Bayside Marina Company and Canoes & Kayaks Inc., share officers, directors,
employees, property, and equipment. In reliance on Bayside Marina’s
reputation, Delivery Transport Inc. contracts to perform services for Canoes &
Kayaks, but the firm does not pay. In terms of liability to Delivery Transport, a
court is most likely to treat Bayside Marina and Canoes & Kayaks as
a. a pass-through entity.
b. a natural person.
c. a tax-paying entity.
d. a partnership by estoppel.
6 TEST BANK B—UNIT EIGHT: BUSINESS ORGANIZATIONS
B6. 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.
B7. 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.
B8. Corbin, a partner in Dentists & Orthodontists Clinic, applies for a loan with
Evermore Bank allegedly on the firm’s behalf but without the authorization of
the other partners. Evermore knows that Corbin is not authorized to take out
the loan. If Corbin defaults on the loan, liability for its unpaid amount will be
imposed on
a. Corbin and Doctors, jointly.
b. Corbin only.
c. Doctors only.
d. Evermore only.
B9. 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.
CHAPTER 37: PARTNERSHIPS AND LIMITED LIABILITY PARTNERSHIPS 7
b. all of the obligations, jointly and severally.
c. all of the obligations, jointly but not severally.
d. only the contractual obligations.
Fact Pattern 37-1B (Questions B10–B13 apply)
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.
B10. Refer to Fact Pattern 37-1B. 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.
B11. Refer to Fact Pattern 37-1B. 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.
B12. Refer to Fact Pattern 37-1B. Bryn’s dissociation from the firm results in
a. the automatic termination of the firm’s legal existence.
b. the partnership’s buyout of Bryn’s interest in the firm.
c. the immediate maturity of all partnership debts.
d. Bryn’s purchase of her interest in the partnership from the firm.
8 TEST BANK B—UNIT EIGHT: BUSINESS ORGANIZATIONS
B13. Refer to Fact Pattern 37-1B. 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.
B14. 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 the other partners’
consent.
c. must dissociate from the partnership.
d. may terminate the partnership.
B15. Nazih and Ovidia are limited partners in Physicians Medical Center, a limited
partnership. In terms of the firm’s books and information regarding partnership
business, Nazih and Ovidia 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.
B16. Round-Up Ranch and Smith & Jones, Accountants, are limited liability
partnerships (LLPs). 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.
CHAPTER 37: PARTNERSHIPS AND LIMITED LIABILITY PARTNERSHIPS 9
d. only a few states have enacted LLP statutes.
B17. Hillside Vineyards 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.
B18. Nikki and Orlando are limited partners in Port City Exports, a limited partner-
ship. 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.
B19. Commercial Credit & Finance is a limited partnership. Derry, Eleni, and Frey
are the general partners. Derry dies. The partnership can
a. continue only after a distribution of its assets.
b. continue only as a general partnership.
c. continue only if Eleni and Frey consent.
d. not continue because Derry’s death dissolves the firm.
B20. Buckley is a general partner in Cut-Rate Shipping, LLLP, a limited liability lim-
ited partnership, which cannot pay its debts. Buckley is personally liable for the
debts
a. in proportion to the number of partners in the firm.
b. to no extent.
10 TEST BANK B—UNIT EIGHT: BUSINESS ORGANIZATIONS
c. to the extent of his capital contribution.
d. to the full extent.
ESSAY QUESTIONS
B1. 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?
B2. 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?
CHAPTER 37: PARTNERSHIPS AND LIMITED LIABILITY PARTNERSHIPS 11
