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Foundations of Law
Business Law & Bankruptcy
Other Business Forms
The Limited Partnership

Question 1

Elvin and Andy sign a five-year partnership agreement. At the end of the fifth year, they decide to continue working together. This partnership is terminable:

at will by either partner

Correct In the case of a partnership with a stated limited life, the partnership is deemed to have ended at the termination of the proscribed period. If, however, the partnership is continued by the partners without a formal contract governing its continuance, the partnership is deemed to be 'at will' ' as is the case in an informal partnership ' and may be dissolved by any one partner's choice to leave the partnership.

Incorrect! In the case of a partnership with a stated limited life, the partnership is deemed to have ended at the termination of the proscribed period. If, however, the partnership is continued by the partners without a formal contract governing its continuance, the partnership is deemed to be 'at will' ' as is the case in an informal partnership ' and may be dissolved by any one partner's choice to leave the partnership.

only after another 5 years

Correct

Incorrect!

only if either partner withdraws

Correct

Incorrect!

none of the above

Correct

Incorrect!

Question 2

Roscoe is forced to sell his partnership interest in a general partnership to pay his largest creditor. The transfer of his partnership interest will:

result in dissolution of the partnership

Correct

Incorrect!

have no effect on the partnership

Correct Transfer of a partnership interest to another party has no effect on the partnership as the partnership interest is the sole property of the partner. As such, any partner may transfer his interest freely without dissolving or otherwise diminishing the partnership. In the example above, Roscoe would still remain a partner of the firm (without an interest in the partnership) and the creditor has no legal relation to the partnership.

Incorrect! Transfer of a partnership interest to another party has no effect on the partnership as the partnership interest is the sole property of the partner. As such, any partner may transfer his interest freely without dissolving or otherwise diminishing the partnership. In the example above, Roscoe would still remain a partner of the firm (without an interest in the partnership) and the creditor has no legal relation to the partnership.

enable the creditor to become a partner

Correct

Incorrect!

none of the above

Correct

Incorrect!

Question 3

Four people are general partners in a medical practice. One partner dies three years after the formation of the partnership. The partnership

continues to operate

Correct

Incorrect!

becomes a sole proprietorship

Correct

Incorrect!

is dissolved

Correct In the case of a general partnership, the death of any partner results in automatic legal dissolution of the partnership. While the remaining partners may decide to continue operation of the firm, they must recreate the partnership to form it with only the remaining members.

Incorrect! In the case of a general partnership, the death of any partner results in automatic legal dissolution of the partnership. While the remaining partners may decide to continue operation of the firm, they must recreate the partnership to form it with only the remaining members.

none of the above

Correct

Incorrect!

Question 4

Hans, Erwin, and Webster are partners in a computer company. Webster decides to leave the partnership. Hans signs a contract prior to the decision. The contract is binding on

Hans and Erwin

Correct

Incorrect!

the partnership

Correct While the partnership is still in existence, all partners retain full legal liability for all debts that are considered debts of the partnership. Thus, while Webster may have decided to leave the firm, he still retains liability as to all the firm's debts up and until he formally leaves the company.

Incorrect! While the partnership is still in existence, all partners retain full legal liability for all debts that are considered debts of the partnership. Thus, while Webster may have decided to leave the firm, he still retains liability as to all the firm's debts up and until he formally leaves the company.

Hans only

Correct

Incorrect!

none of the above

Correct

Incorrect!

Question 5

Sherry and Mike are partners - Mike contributing 75% of the capital - profits being split equally. When the partnership becomes unprofitable they dissolve it. The partnerships' liability are greater than its assets, and Sherry pays them off. Sherry

has a right of contribution against Mike to recover his share of the excess

Correct This question may seem a bit tricky, but ultimately just turns on the fact that the obligations of a partnership are shared equally amongst partners in a default case. In this case, Sherry and Mike have equal rights to the profits of the partnership. As such, an absent an agreement to the contrary, the law implies that each partner will have a corresponding (i.e. 50%) share of the partnership's losses and obligations. Because Sherry paid off the partnership's debts on her own, she may choose to seek contribution from Mike for his share of those obligations that belonged to the partnership.

Incorrect! This question may seem a bit tricky, but ultimately just turns on the fact that the obligations of a partnership are shared equally amongst partners in a default case. In this case, Sherry and Mike have equal rights to the profits of the partnership. As such, an absent an agreement to the contrary, the law implies that each partner will have a corresponding (i.e. 50%) share of the partnership's losses and obligations. Because Sherry paid off the partnership's debts on her own, she may choose to seek contribution from Mike for his share of those obligations that belonged to the partnership.

has a right of contribution against Mike to recover all the excess

Correct

Incorrect!

is entitled to nothing from Mike but can take a tax deduction

Correct

Incorrect!

is entitled to nothing from Mike and is not entitled to a tax deduction

Correct

Incorrect!

Question 6

Vera and William are partners and BankOne is the firm's creditor. Ace Mortgage is William's personal creditor. On the firm's dissolution, who has priority over the firm's assets?

Ace Mortgage

Correct

Incorrect!

BankOne

Correct BankOne is the firm's creditor and must be satisfied to the full extent of the debt it is owed prior to any payment to the partners. Furthermore, an individual partner's personal obligations have no effect on the partnership and such creditor's may only attach the partner's property up to the extent of her partnership interest.

Incorrect! BankOne is the firm's creditor and must be satisfied to the full extent of the debt it is owed prior to any payment to the partners. Furthermore, an individual partner's personal obligations have no effect on the partnership and such creditor's may only attach the partner's property up to the extent of her partnership interest.

Vera and William

Correct

Incorrect!

None of the above

Correct

Incorrect!

Question 7

Wally and Theodore are limited partners in a limited partnership. To avoid personal liability for partnership obligations, they must not

contribute cash or property to the firm

Correct

Incorrect!

acquire an interest in the firm

Correct

Incorrect!

undertake the managerial responsibilities

Correct The rules governing Limited Liability Partnerships (LLP's) state that limited partners have no liability to the firm beyond their capital contribution to the extent that they refrain from active management of the firm. As such, any limited partner that wishes to retain its liability shield must act in a manner that does not give a court the opportunity to imply that the partner has acted in a manner that equates to management of the firm. If a limited partner does act in a management capacity, a court may imply that the partner was, in fact, a general partner, and thereby hold that partner personally liable to an unlimited degree.

Incorrect! The rules governing Limited Liability Partnerships (LLP's) state that limited partners have no liability to the firm beyond their capital contribution to the extent that they refrain from active management of the firm. As such, any limited partner that wishes to retain its liability shield must act in a manner that does not give a court the opportunity to imply that the partner has acted in a manner that equates to management of the firm. If a limited partner does act in a management capacity, a court may imply that the partner was, in fact, a general partner, and thereby hold that partner personally liable to an unlimited degree.

all of the above

Correct

Incorrect!

Question 8

A limited partnership must have at least:

one general partner and one limited partner

Correct While an LLP may have as many general and limited partners as it wants, the law in all states requires that an LLP have at least one individual or party that is identified as the general partner (GP) and one limited partner (LP). Typically, an LLP will have a single general partner and several limited partners.

Incorrect! While an LLP may have as many general and limited partners as it wants, the law in all states requires that an LLP have at least one individual or party that is identified as the general partner (GP) and one limited partner (LP). Typically, an LLP will have a single general partner and several limited partners.

one general partner and two limited partners

Correct

Incorrect!

two general partners and one limited partner

Correct

Incorrect!

none of the above

Correct

Incorrect!

Question 9

In most states, a limited partnership will be created at the time:

the partnership agreement is executed

Correct

Incorrect!

the partners pay their capital contributions

Correct

Incorrect!

the certificate of limited partnership is filed

Correct A limited partnership, unlike a general partnership, requires formal creation under the laws of the state in which the partnership is located. While there are generally no state requirements that an LLP need by approved by the state, the filing of a formal limited partnership certificate is a prerequisite to the creation of the firm.

Incorrect! A limited partnership, unlike a general partnership, requires formal creation under the laws of the state in which the partnership is located. While there are generally no state requirements that an LLP need by approved by the state, the filing of a formal limited partnership certificate is a prerequisite to the creation of the firm.

none of the above

Correct

Incorrect!

Question 10

Limited partners are entitled to:

access to partnership books

Correct

Incorrect!

a return of their capital contributions

Correct

Incorrect!

assign their interests in the partnership

Correct

Incorrect!

all of the above

Correct Limited partners have several rights with regards to the operation of the partnership. First, as investors, limited partners are entitled to a review of the firms operating financials in order to insure that the firm is protecting their investment. Additionally, in the event of a partnership dissolution, LP's are entitled to a return of their capital contribution in the way a partner would be in a general partnership. Finally, limited partner's may freely transfer their interests in a partnership. While such a transfer is legal, the buyer of the partnership interest only has rights in the interest, and does not become a partner in the firm.

Incorrect! Limited partners have several rights with regards to the operation of the partnership. First, as investors, limited partners are entitled to a review of the firms operating financials in order to insure that the firm is protecting their investment. Additionally, in the event of a partnership dissolution, LP's are entitled to a return of their capital contribution in the way a partner would be in a general partnership. Finally, limited partner's may freely transfer their interests in a partnership. While such a transfer is legal, the buyer of the partnership interest only has rights in the interest, and does not become a partner in the firm.

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