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Foundations of Law
Business Law & Bankruptcy
Other Business Forms
Partnerships

Question 1

In resolving disputes over whether a business enterprise may be characterized as a partnership, a court will look to see whether the existing business relationship involves:

a sharing of profits

Correct

Incorrect!

a sharing of losses

Correct

Incorrect!

an equal right in management

Correct

Incorrect!

all of the above

Correct Trying to determine if a partnership exists can be an exceedingly complex task for a court in a situation where no formal partnership exists. As such, the court will typically look to any factor it may find helpful to answer the question. Thus, the list above is a sampling of those characteristics of a partnership that a court will look for when a question about whether the partnership was formed arises.

Incorrect! Trying to determine if a partnership exists can be an exceedingly complex task for a court in a situation where no formal partnership exists. As such, the court will typically look to any factor it may find helpful to answer the question. Thus, the list above is a sampling of those characteristics of a partnership that a court will look for when a question about whether the partnership was formed arises.

Question 2

Earl owes the Circle Ranch (a partnership) $1,000. Earl agrees to pay the Ranch a percentage of his profits until the debt is paid. Because of this, the Ranch is Earl's:

general partner

Correct

Incorrect!

limited partner

Correct

Incorrect!

creditor

Correct Simply owing a debt to a partnership does not make an individual a partner. Rather, like any other business form, a partnership may take on debts and hold the owners of those debts as simple creditors.

Incorrect! Simply owing a debt to a partnership does not make an individual a partner. Rather, like any other business form, a partnership may take on debts and hold the owners of those debts as simple creditors.

none of the above

Correct

Incorrect!

Question 3

Fred and Barney are the only partners in a business. John obtains a judgment against the partnership. The liability of the partnership must first be paid out of assets owned:

by the partnership

Correct Stated in the question is the language that should lead you to an answer here. The question states that John's judgment was 'against the partnership.' As such, primary obligation for the payment of the judgment rests with the partnership itself. It is possible, depending on the nature of the partnership (i.e. is it a general partnership or an LLP) that the partners may be liable ' either severally or jointly ' if the partnership is able to pay. However, the liability of the partners is secondary to that of the partnership in this case.

Incorrect! Stated in the question is the language that should lead you to an answer here. The question states that John's judgment was 'against the partnership.' As such, primary obligation for the payment of the judgment rests with the partnership itself. It is possible, depending on the nature of the partnership (i.e. is it a general partnership or an LLP) that the partners may be liable ' either severally or jointly ' if the partnership is able to pay. However, the liability of the partners is secondary to that of the partnership in this case.

jointly by Fred and Barney

Correct

Incorrect!

separately by Fred or Barney

Correct

Incorrect!

none of the above

Correct

Incorrect!

Question 4

Al and Betty agree while talking on the telephone to form a partnership. Their partnership agreement is legally binding:

only if it is reduced to writing

Correct

Incorrect!

only if valid consideration is exchanged

Correct

Incorrect!

without any further measures

Correct Remember that one of the benefits of a partnership is that it requires little to no formality to have a partnership legally created. While a written partnership agreement, or the payment of funds in exchange for a partnership interest, may be helpful to identify the existence of a partnership, neither of these items is a legal requirement for the creation of a partnership.

Incorrect! Remember that one of the benefits of a partnership is that it requires little to no formality to have a partnership legally created. While a written partnership agreement, or the payment of funds in exchange for a partnership interest, may be helpful to identify the existence of a partnership, neither of these items is a legal requirement for the creation of a partnership.

none of the above

Correct

Incorrect!

Question 5

Hugh and Cray are partners. Without Hugh's knowledge, Cray commits fraud on behalf of the partnership that results in default on 2 bank loans. Regarding the loans, Hugh is:

not responsible at all

Correct

Incorrect!

not responsible unless he declares bankruptcy

Correct

Incorrect!

responsible

Correct All of the partners in a partnership are generally individually and personally liable for any action taken by any partner in furtherance of partnership business

Incorrect! All of the partners in a partnership are generally individually and personally liable for any action taken by any partner in furtherance of partnership business

none of the above

Correct

Incorrect!

Question 6

A decision by the members of a partnership to enter an entirely new business would probably have to be approved by;

a majority of the partners

Correct

Incorrect!

the managing partner

Correct

Incorrect!

all of the partners

Correct In most situations, a formal partnership will have a partnership agreement that handles issues such as the one described in the above question. However, the default answer for a situation in which the partnership will undergo a fundamental change results in a situation where the entire partnership would have to approve. The reason for this is that management of a partnership, by default, is entrusted to all partners in equal proportion. Thus, any partner who disapproves of such a fundamental change may act as a veto on committing to the change.

Incorrect! In most situations, a formal partnership will have a partnership agreement that handles issues such as the one described in the above question. However, the default answer for a situation in which the partnership will undergo a fundamental change results in a situation where the entire partnership would have to approve. The reason for this is that management of a partnership, by default, is entrusted to all partners in equal proportion. Thus, any partner who disapproves of such a fundamental change may act as a veto on committing to the change.

none of the above

Correct

Incorrect!

Question 7

Stacey, a partner in an architectural firm, owes $40,000 personally to several creditors. To satisfy these debts, the creditors may obtain a charging order entitling them to:

Stacey's interests in partnership property

Correct

Incorrect!

Stacey's profits as a partner

Correct While a partner may have a large interest in a partnership, that interest extends only so far as the profits ' i.e. the capital account ' that the partner holds in the partnership. Partnership property, whether used regularly by the partner or not, remains the property of the partnership and is not owned in any way by individual partners up and until the partnership liquidates.

Incorrect! While a partner may have a large interest in a partnership, that interest extends only so far as the profits ' i.e. the capital account ' that the partner holds in the partnership. Partnership property, whether used regularly by the partner or not, remains the property of the partnership and is not owned in any way by individual partners up and until the partnership liquidates.

both A and B

Correct

Incorrect!

none of the above

Correct

Incorrect!

Question 8

Al and Ed are partners. Ed dies. Anita, Ed's widow, files suit to get Ed's desk and chair. The fact that these were purchased by the partnership will:

enable Al to defeat her claims

Correct

Incorrect!

Al can win though he must account for Ed's share

Correct This question has an underlying assumption that makes it a bit tricky. Normally, any and all property, which was purchased by the partnership, is considered partnership property and belongs to the partnership. However, in the case of a general partnership, the death of a partner has the legal effect of dissolving the partnership with the ancillary effect of dividing the partnership property. While the remaining partners may choose to continue the partnership, they must first take account of the individual partners' ownership interests and provide the estate of the deceased partner with its share of the partnership property.

Incorrect! This question has an underlying assumption that makes it a bit tricky. Normally, any and all property, which was purchased by the partnership, is considered partnership property and belongs to the partnership. However, in the case of a general partnership, the death of a partner has the legal effect of dissolving the partnership with the ancillary effect of dividing the partnership property. While the remaining partners may choose to continue the partnership, they must first take account of the individual partners' ownership interests and provide the estate of the deceased partner with its share of the partnership property.

not prevent Anita from taking possession

Correct

Incorrect!

none of the above

Correct

Incorrect!

Question 9

In general, a partner who devotes his time and energy to partnership business will

not get compensation if the agreement is silent

Correct A partner is not legally entitled to any form of compensation absent an agreement to the contrary. Despite the fact that a partner may work long and hard for the firm, the basis of her compensation is associated solely with the rules of the agreement that governs the partnership.

Incorrect! A partner is not legally entitled to any form of compensation absent an agreement to the contrary. Despite the fact that a partner may work long and hard for the firm, the basis of her compensation is associated solely with the rules of the agreement that governs the partnership.

be entitled to compensation even if agreement is silent

Correct

Incorrect!

be entitled to compensation if an equity partner

Correct

Incorrect!

none of the above

Correct

Incorrect!

Question 10

Erica is a partner in a firm and applies for a loan for the partnership without authorization from the other partners. If the bank knows Erica is not authorized then:

the partnership will be liable

Correct

Incorrect!

Erica alone will be liable

Correct While the general rule is that a partnership will be liable for the acts of all partners in furtherance of the partnership, such an exclusive rule does have its limits. In this case, the liability of the entire partnership for one partner's action is limited by the fact that the lender had knowledge in advance that the partner did not have the authority to contract on behalf of the entire partnership. As such, the lender has acted in a manner that leaves it with some of the responsibility ' and therefore liability ' for situations in which the debt goes unpaid.

Incorrect! While the general rule is that a partnership will be liable for the acts of all partners in furtherance of the partnership, such an exclusive rule does have its limits. In this case, the liability of the entire partnership for one partner's action is limited by the fact that the lender had knowledge in advance that the partner did not have the authority to contract on behalf of the entire partnership. As such, the lender has acted in a manner that leaves it with some of the responsibility ' and therefore liability ' for situations in which the debt goes unpaid.

Erica and the partnership will be jointly liable

Correct

Incorrect!

Erica and the partnership will be jointly and severally liable

Correct

Incorrect!

Question 11

Ben is admitted to an existing partnership. Several debts and obligations incurred prior to the date of his admission become due. Ben is:

personally liable for the obligations

Correct

Incorrect!

liable up to the amount of his capital contribution

Correct In a partnership, a partner is liable for his share of the partnership's liabilities. This includes liabilities that were incurred prior to his entering the partnership. However, the law of partnership is such that any liability for the partner in the event of previously incurred debts is limited, as to that partner, to the extent of the partner's initial capital contribution. Thus, while the firm may use the partner's capital contribution to pay the firm's debts, the partner has no obligation beyond that contribution to the payment of antecedent debts.

Incorrect! In a partnership, a partner is liable for his share of the partnership's liabilities. This includes liabilities that were incurred prior to his entering the partnership. However, the law of partnership is such that any liability for the partner in the event of previously incurred debts is limited, as to that partner, to the extent of the partner's initial capital contribution. Thus, while the firm may use the partner's capital contribution to pay the firm's debts, the partner has no obligation beyond that contribution to the payment of antecedent debts.

not obligated under these debts

Correct

Incorrect!

none of the above

Correct

Incorrect!

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