1. (b) A partnership is an association of two or more co-owners of a business for profit. Thus, (II) is a requirement of a partnership. It is not necessary that each piece of property used in the business be co-owned by all the partners.
For example, the partnership may lease equipment from a third party or may use property that is owned by one partner and not others. Thus (I) is not a requirement of a partnership.
2. (b) A partnership is an association of two or more co-owners of a business for profit. Thus, to create a partnership, the parties must intend to conduct a business for profit. It is not necessary to share gross receipts from a business to form a partnership. Indeed, partners share net receipts, not gross receipts.
3. (a) A partnership is not one of the six types of contracts that require a writing under the statute of frauds (GRIPE + marriage). Only a partnership impossible to perform in one year and a limited partnership would require a writing. Answers (b), (c) and (d) are incorrect because co-ownership of a business for profit and with the intent to create a partnership are all necessary requirements to create an express partnership.
4. (d) A partnership is not usually considered to be a separate legal entity. Specifically, a partnership does not pay federal income tax. A partnership does not have perpetual existence like a corporation. Only answer (d) states no unlimited duration for a partnership and no obligation to pay federal income tax.
5. (c) Partners are agents of the partnership and each other. Thus, agency rules apply. If a partner commits a tort while acting in the scope of partnership business, the partner would be liable, the partnership would be liable and all other partners would be liable (respondeat superior). Partners are joint and severally liable for all partnership torts. Answers (a) and (b) are incorrect because the partner committing the tort, the partnership and all other partners would be liable. Answer (d) is incorrect because each partner would be personally liable for the whole amount of any judgment, not just an equal share.
6. (c) Statement I is correct because partners are agents of the partnership and agents of each other. Since partners are co-owners of the business, when a partner acts on behalf of the business the partner is acting as both a principal and as an agent. Statement II is correct partners are jointly liable on all partnership debts and contract obligations. This means all partners must be sued as a group.
7. (d) Partners are agents of the partnership and each other. Thus, a partner can bind the partnership and fellow partners to a contract if the partner had actual authority or apparent authority. Although Locke exceeded Locke’s actual authority, the partnership will still be liable based on Locke’s apparent authority. Apparent authority depends on how things appear to third parties. It was reasonable for Gage to believe that a partner, like Locke, could purchase 15 stoves for the business. Since it appeared to Gage that Locke was authorized, Gage will win based on apparent authority. Thus (d) is correct and (a) is incorrect. Answer (b) is incorrect because Locke was an agent of the partnership. Answer (c) is incorrect because Locke did not have express authority. The partnership agreement expressly stated Locke was not authorized to make such contracts.
8. (c) Partners are agents of the partnership and each other. A partner acting with real or apparent authority can impose contract liability on the partnership and on their fellow partners. Thus, a partner selling goods with either real or apparent authority would bind the partnership. Answer (a) is incorrect because apparent authority depends on how things appear to third parties, not on the express provisions of the partnership agreement. Answer (b) is incorrect because if a partner’s authority was expressly limited by a resolution and the third party was unaware of the resolution, it may still appear that the partner was authorized. In such a case, apparent authority would exist. Answer (d) is incorrect because partnership law requires unanimous consent of all partners to submit a claim to arbitration.
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9. (a) Statement I is correct because partners are jointly and severally liable for all partnership torts. This is because partners are agents of the partnership and each other. If a partner commits a tort while acting in the scope of the agency, the principal is liable. Statement II is incorrect because general partners are jointly liable for all partnership debts and contract obligations whether they actually authorized them or not. Additionally, partners are agents of the partnership and each other and therefore can be liable for actions sanctioned not only by actual authority, but also by apparent authority.
10. (b) To form a limited partnership in a state, there must be a special state statute that permits limited partnerships. The limited partnership must file a certificate of limited partnership with the state. Answer (a) is incorrect because a general partner is not required to make a capital contribution. Answer (c) is incorrect because a limited partnership must have at least one general partner and general partners are personally liable for all partnership debts.
Answer (d) is incorrect because although a general partner may also be a limited partner in the same partnership at the same time, a general partner is not required to also be a limited partner.
11. (c) Both general and limited partners may be creditors of a limited partnership. A general partner may be either a secured or an unsecured creditor and so may a limited partner. Thus, (c) is correct and (a) is incorrect. Answer (b) is incorrect because a general partner may also be a limited partner in the same partnership at the same time. Answer (d) is incorrect because a limited partnership must have at least one general partner and general partners are personally liable for all partnership debts.
12. (d) Limited partners have no personal liability beyond their investment, thus they are not personally liable.
Limited partners may not take part in the control of the partnership. If they do, they are liable like general partners to anyone reasonably believing they were a general partner. The only answer that reflects that they are not personally liable and may not take part in control of the partnership is (d).
13. (a) The law gives to all investors the right to inspect books and records at reasonable times. Stockholders, general partners and limited partners all have this right. Thus, a limited partner may obtain financial information to include tax returns. Answer (b) is incorrect because a limited partnership must have at least one general partner and general partners are personally liable for all partnership debts. Answer (c) is incorrect because a limited partner may also be a general partner in the same partnership at the same time. Answer (d) is incorrect because a limited partner may not take part in the control of the partnership.
14. (b) Limited partners may not take part in the control of the partnership. If they do, they are liable like general partners to anyone reasonably believing they were a general partner. Thus, a limited partner may not participate in the management of the partnership in the same manner as general partners without losing their limited liability. Answer (a) is incorrect because limited partners are not personally liable for partnership debts. Answer (c) is incorrect because changes in limited partners do not dissolve the partnership. Only changes in general partners cause the dissolution of the partnership. Answer (d) is incorrect because limited partners are not agents of the partnership, only general partners are agents of the partnership.
15. (a) Both a limited partnership and a corporation are created pursuant to state statutes and both must file with the secretary of state. Answer (b) is incorrect because a general partner in a limited partnership is personally liable for partnership debts. Equally, corporate law permits piercing of the corporate veil and holding stockholders personally liable in certain situations. Answer (c) is incorrect because a limited partnership is not recognized as a taxable entity for federal income tax purposes. Answer (d) is incorrect because only a corporation has perpetual existence.
16. (d) Answers (a), (b) and (c) are incorrect because it takes unanimous consent of all partners to submit a claim to arbitration, to confess a judgment (admit liability in a law suit) and to sell the partnership’s goodwill. Answer (d) is correct because leasing office space for the partnership by a partner would be within the partner’s apparent authority.
Since it would be reasonable to believe that a partner could lease space, the partnership would be bound.
17. (c) Each partner has an equal right to share in profits and losses, unless otherwise agreed. Thus, profits are to be divided equally among the partners when the agreement is silent on the matter. Answers (a), (b) and (d) are incorrect because profits are not divided based on capital contributions, on management participation or proportionally. Profits are
18. (d) If a division of profits is specified in a partnership agreement, but not a division of losses, losses will be divided in the same manner as profits. The partnership agreement for Owen specified that profits were to split according to capital contributions (Moore - $10,000, Noon - $30,000 and Kale - $50,000). Therefore, losses must be split the same way. With losses of $180,000, Kale’s share of the loss would be $100,000 (5/9 of $180,000) and only (d) reflects this amount.
19. (b) If a division of profits is specified in a partnership agreement, but not a division of losses, losses will be divided in the same manner as profits. This partnership agreement specified that profits were to be split Dowd 40%, Elgar -30%, Frost - 20% and Grant - 10%. Therefore losses must be split the same way. With losses of $200,000 and Grant’s share being 10%, Grant’s share of the losses would be $20,000. Only answer (b) reflects this amount.
20. (a) The order of distribution upon dissolution is to pay creditors, then pay back loans made by the partners, then pay back capital contributions. All liabilities have been paid and there were not any loans made by the partners.
The next order of distribution is to pay back capital contributions. The partners share of losses was allocated to their capital accounts. Dowd contributed $120,000 and had a $40% share of the $200,000 loss ($80,000). Thus, Dowd is due
$40,000 ($120,000 minus $80,000). Elgar contributed $100,000 and had a 30% share of a $200,000 loss ($60,000).
Thus, Elgar is due $40,000 ($100,000 minus $60,000). Frost contributed $75,000 and had a 20% share of a $200,000 loss ($40,000). Thus, Frost is due $35,000 ($75,000 minus $40,000). Grant contributed $11,000 and had a 10% share of a
$200,000 loss ($20,000). Thus, Grant should contribute $9,000 because of the negative balance ($11,000 minus
$20,000). Grant has refused to contribute the $9,000, thus each partner must proportionately share in this shortfall.
Dowd’s proportionate share is 4/9 of $9,000 ($4,000), Elgar’s is 1/3 of $9,000 ($3,000) and Frost’s is 2/9 of $9,000 ($2,000) Final payment would be Dowd $36,000 ($40,000 minus $4,000), Elgar $37,000 ($40,000 minus $3,000) and Frost $33,000 ($35,000 minus $2,000) equaling the $106,000 available. The only answer that reflects that Elgar receives
$37,000 is (a).
21. (d) An assignment of a general partnership interest confers on the assignee only the right to receive the assignor’s share of profits, if any. Answer (a) is incorrect because the assignee does not become a partner without the consent of all other partners. Answer (b) is incorrect because the assignor is still liable for debts and the assignee is not liable. Answer (c) is incorrect because an assignment does not dissolve the partnership.
22. (b) An assignee of a partner’s interest in a partnership does not become a substitute partner. The assignee receives no rights other than the right to receive the assignor’s share of profits, if any. Thus, Bean received the right to Cobb’s share of profits, but did not receive the right to participate in the management of the partnership.
Only answer (b) reflects the right to profits, but not the right to participate in management.
23. (c) A partner may validly assign the right to receive partnership distributions. The assignee would only receive the right to receive the assignor’s share of profits, if any. A partner may not validly assign rights to specific partnership property because it takes unanimous consent of all partners to transfer partnership property to others. Only answer (c) reflects the right to assign distributions, but not the right to assign partnership property.
24. (c) Partners are agents of the partnership and each other. Thus, agency rules apply. If a partnership dissolves, partners must give actual notice to old customers and published notice to new ones. Failure of a partner to give proper notice would give a partner apparent authority to act on behalf of the partnership with customers who were unaware of the dissolution. Although dissolution would discharge a partner’s actual authority, it does not discharge a partner’s apparent authority. Only answer (c) reflects that a partner’s liability is not automatically discharged by dissolution and that apparent authority would continue.
25. (a) A partnership impossible to complete in one year would require a writing under the statute of frauds. The partners agreed the partnership was not to be terminated for five years and thus, a writing was required. Answer (b) is incorrect because how profits are to be divided has no bearing on whether a writing is required. Answers (c) and (d) are incorrect because a writing was required for this partnership and thus, the partnership could not be oral.
26. (c) If a division of profits is specified in a partnership agreement, but not a division of losses, losses will be divided in the same manner as profits. This partnership agreement specified that profits were to be split Downs - 40%, Frey
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and Vick - 30% each. Therefore, losses will be split the same way. Vick has a 30% share of a $30,000 loss or $9,000.
Only answer (c) reflects this amount.
27. (a) Under RUP, if a majority of the partners agree to continue the partnership, they may do so and the partnership is not dissolved. Answer (b) is incorrect because the partnership agreement merely states that the partnership will not end for five years, inferring that it may go beyond five years. Answer (c) is incorrect because one of the significant changes under RUPA is that a partnership is an entity in itself and the departure of a partner does not automatically dissolve the partnership. In a two-person partnership, the departure of one partner would dissolve the partnership, since a partnership must have two persons. Answer (d) is incorrect because Frey’s interest becomes part of his estate; however, the estate cannot become a partner without the consent of all the other partners, which is unlikely. The estate’s interest is similar to that of an assignee.
28. (d) Joint ventures are a business association of two or more co-owners acting together for profit for a limited purpose and for a limited duration. They are usually for a single undertaking. Joint ventures are treated as a partnership in most cases by the law. Answer (a) is incorrect because a joint venture may have more than two persons. Answer (b) is incorrect because the co-owners must act together for profit. Answer (c) is incorrect because a joint venture is not a corporate enterprise.
29. (d) A partner’s estate does not become a partner unless agreed to by all the other partners. The estate is responsible for all partnership liabilities up until the partner’s death. The partnership would not automatically dissolve if a majority of the remaining partners agree to continue.
30. (a) Park may dissolve the partnership at any time. Since there are only two partners, the departure of Park leaves only one partner. A partnership requires two partners operating a business for profit.
31. (c) A partner is personally liable for all partnership debts that occurred while he was a partner. Fein was a member of the ABC partnership and was personally liable for all debts of ABC that occurred while he was a partner. The agreement to hold Fein harmless was made by the other partners and not by the creditors. The agreement to hold Fein harmless does not relieve Fein from liability to creditors, it merely gives Fein the right to recover any amounts he may have to pay to the creditors from the other partners. Answers (a) and (b) are incorrect because the creditors are not prevented from holding Fein liable for debts that occurred while Fein was a partner.
Answer (d) is incorrect because the hold harmless agreement allows Fein to recover from the other partners all amounts he may have to pay to creditors, not just the amount in excess of his proportionate share.
32. (b) Everything in a partnership is equal unless otherwise agreed. This includes the right to participate in management. Since the partners agreed to admit Ward as a partner, Ward has the right to participate in management. Answer (a) is incorrect because Ward has an equal right in all partnership matters unless the partners specifically agree otherwise. An assignee acquires only the right to receive their assignor’s share of profits. Ward was more than an assignee, Ward was a partner. Answer (c) is incorrect because Ward is only personally liable for partnership debts that occur after (s)he is admitted as a partner. Ward would not be personally liable for debts that occurred prior to becoming a partner. Answer (d) is incorrect because a partner is not required to contribute cash or property to become a partner. They may contribute services or they may not contribute anything.
33. (a) An incoming partner is not personally liable for partnership debts occurring prior to becoming a partner. However, an incoming partner’s interest in partnership property can be attached by creditors. Thus, the liability of Dill (the incoming partner) would be limited to Dill’s interest in partnership property. Answer (b) is incorrect because a departing partner is personally liable for all partnership debts that occurred while (s)he was a partner. Answer (c) is incorrect because Ard cannot recover from the other partners the full amount that Ard paid creditors unless the other partners specifically agreed to hold Ard harmless. There was no hold harmless agreement given to Ard. Answer (d) is incorrect because Dill is only personally liable for partnership debts that occur after (s)he is admitted as a partner. Dill would not be personally liable for debts that occurred prior to becoming a partner.
34. (a) Upon dissolution of a general partnership the following order of distribution occurs: first creditors are paid, second partners are repaid for any loans or advances made to the partnership, third capital
35. (a) Upon dissolution of a general partnership the following order of distribution occurs: first creditors are paid, second partners are repaid for any loans or advances made to the partnership, third capital contributions are paid and lastly profits are split. Creditors are owed $160,000, there are no loans made by partners and a total of $180,000 is due for capital contributions (Long - $100,000, Pine - $60,000 and
Rice-$20,000). Thus, $340,000 is needed to pay creditors and capital contributions ($180,000 + $160,000). Of the
$340,000 needed, only $172,000 is available from the sale of assets. This leaves a shortfall of $168,000 ($340,000 minus $172,000 = $168,000). Long's share of the shortfall is 1/2 of $168,000 or $84,000. Thus, Long will receive his capital contribution ($100,000) minus his share of the shortfall ($84,000), or $16,000. Pine’s share of the shortfall is 1/3 of $168,000 or $56,000. Thus Pine will receive his capital contribution ($60,000) minus his share of the shortfall ($56,000), or $4,000. Rice’s share of the shortfall is 1/6 of $168,000 or $28,000. Rice will receive his capital contribution ($20,000) minus his share of the shortfall ($28,000) leaving a negative balance of $8,000. Thus, Rice will have to contribute an additional $8,000. The only answer that reflects this distribution is (a).
36. (c) Partnership creditors can only go after a partner personally after all partnership assets are first exhausted. Thus, Trent can only go after the personal assets of Eller after the partnership assets are exhausted.
Answer (a) and (b) are incorrect because a creditor can collect a judgment from both partnership assets and from partners personally. Answer (d) is incorrect because partnership creditors must first exhaust partnership assets before they can go after a partner personally.
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