Ch.37 Business Forms & Partnerships Test Bank Answers

Business Law, 17e (Langvardt)

Chapter 37 Introduction to Forms of Business and Formation of Partnerships

1) The decision on what form of business to make a startup business is important because it will affect the business owner's liability and control of the business.

2) A sole proprietorship is a legal entity separate from its owner.

3) The sole proprietor has the right to deduct business losses on his individual tax return.

4) A partnership is an income tax-paying entity for federal income tax purposes.

5) Individuals in a valid general partnership are not personally liable for the obligations of the business.

6) John is a partner of Aegon Services, a limited liability partnership firm. He committed fraud and embezzled $1 million from a client. The other partners would not be personally liable for John's malpractice.

7) A limited partner in a limited partnership has the right to manage the limited partnership business.

8) No formalities are required in order to establish a partnership.

9) Generally, professional shareholders are personally liable for the obligations of the professional corporation.

10) The general law governing general partnerships is primarily found in the Revised Uniform Partnership Act (RUPA).

11) Ann and Susan want to enter into a partnership business of selling cars for a term of five years. They must prepare a partnership agreement in writing to be enforceable under the statute of frauds.

12) As an association, a partnership is a voluntary and consensual relationship.

13) A written agreement to the effect that the parties do not intend to form a partnership is not conclusive if their actions provide evidence of their intent to form a relationship that meets the RUPA partnership test.

14) You can form a partnership with one individual.

15) Under the doctrine of purported partners, a third party may hold liable persons who purport to be partners.

16) Loans made by partners to a partnership are partnership capital.

17) The equity of a partnership is called partnership capital.

18) If a partnership leases a building that belongs to one of the partners, the property is said to be owned by the partnership.

19) The charging-order creditor is a lien creditor and is entitled to receive only the partner's share of the partnership distributions.

20) A mining partner's interest is not freely transferable.

21) Jack is the sole proprietor of his sewing business, Jack's Custom Tailoring. Jack is required to:

A) file the trade name under a state statute requiring the registration of fictitious business names.

B) put notice of his trade name in the local newspaper.

C) register the trade name with the state's attorney general's office.

D) file a separate federal tax return for the business.

22) Susan Mills, a sole proprietor, operates her bakery under the name Susan's Sweets. If she were sued by a creditor, the creditor would address his complaint to:

A) Susan Mills or Susan's Sweets.

B) Susan's Sweets.

C) Susan Mills.

D) Susan Mills, doing business as Susan's Sweets.

23) A(n) ________ is a close corporation whose shareholders have elected to be taxed essentially like partners are taxed under federal income tax law.

A) sole proprietorship

B) LLLP

C) LLC

D) S Corporation

24) Which of the following statements about professional corporations is false?

A) A professional corporation is formed only by a filing with the secretary of state.

B) A professional corporation is managed by a board of directors, unless a statute provides otherwise.

C) A professional corporation's shareholders have personal liability for the obligations of the professional corporation.

D) A professional corporation's rigid management structure makes it inappropriate for some smaller professional practices.

25) Which of the following business forms means personal liability for the owner of the business?

A) Sole proprietorship

B) LLC

C) Corporation

D) LLP

26) Which of the following is an advantage of a sole proprietorship?

A) Owners of sole proprietorships can raise a lot of capital quickly for expansion purposes.

B) The owner of a sole proprietorship has complete control over the business.

C) The sole proprietorship's existence does not depend entirely upon the sole proprietor.

D) The owner of a sole proprietorship has no liability.

27) Which of the following is true about a sole proprietorship?

A) A sole proprietorship is a legal entity.

B) A sole proprietorship cannot sue or be sued.

C) A sole proprietorship as form of business can be transferred to someone else.

D) A sole proprietorship has a life of its own apart from its owner.

28) Which of the following is true about a partnership?

A) It is not a tax-paying entity for federal income tax purposes.

B) Business losses are deductible based on the limit on a partner's individual tax return.

C) It does not have a life apart from its owners.

D) Partners of a partnership do not assume personal liability for obligations of the business.

29) A ________ is a partnership whose partners have elected limited liability status.

A) limited liability company

B) professional corporation

C) professional partnership

D) limited liability partnership

30) A ________ has one or more general partners and one or more limited partners.

A) limited liability partnership

B) professional corporation

C) limited partnership

D) limited liability company

31) Which of the following is true about a limited partnership?

A) A limited partnership has difficulties raising large amounts of capital.

B) A limited partnership can be created only by complying with a state statute permitting limited partnerships.

C) A limited partnership cannot be transferred to another person.

D) Limited partners are liable for the obligations of the limited partnership after making their capital contributions.

32) Which of the following is an advantage of a limited partnership?

A) It has the ability to attract large amounts of capital.

B) It is a nontax paying entity.

C) It can be created by default.

D) It cannot be transferred to another person.

33) In a limited partnership, general partners:

A) have the right to manage the business.

B) are not liable for the firm's debts.

C) are nonparticipating investors.

D) cannot transfer their ownership interest.

34) In a limited partnership, limited partners:

A) play an active role in the management of the firm.

B) do not pay federal income tax on their share of the profits.

C) are passive investors.

D) have unlimited liability for the firm's debts.

35) Partners of a partnership:

A) are not liable for all of the partnership's obligations.

B) are entitled to income of the partnership, which must be reported on their individual federal income tax returns.

C) are not permitted to deduct partnership losses on their individual federal income tax returns.

D) can create a partnership only by complying with a statute.

36) A limited partnership:

A) dissolves when a limited partner dies.

B) may not have a corporation as a general partner.

C) may be taxed either as a partnership or as a corporation.

D) may be created by default.

37) The ________ is the preferred form of business for professionals and is especially good for consultants and auditors, allowing them management flexibility while insulating them mostly from personal liability.

A) S Corporation

B) LLLP

C) LLC

D) LLP

38) Which of the following is true of a corporation?

A) A corporation is not a tax-paying entity for federal income tax purposes.

B) A corporation does not have a life separate from its owners and its managers.

C) A corporation has the ability to attract capital, more than the limited partnership.

D) A corporation is owned by partners who have founded the business and have the right to manage it.

39) An S corporation:

A) must have at least 100 shareholders.

B) may have only one class of shares.

C) has the ability to attract capital, more than the limited partnership.

D) has the disadvantage of its shareholders being double taxed at the federal tax level.

40) Which legal form of business has the ability to attract the greatest amount of capital from investors?

A) A limited liability company

B) A partnership

C) A corporation

D) A sole proprietorship

41) A(n) ________ is a limited partnership whose partners have elected limited liability status for all the partners.

A) corporation

B) LLLP

C) S Corporation

D) LLP

42) A ________ is owned by shareholders who elect a board of directors to manage the business.

A) limited liability company

B) corporation

C) partnership

D) sole proprietorship

43) Which of the following forms of business always imposes double taxation on the earnings of the business?

A) A corporation

B) A limited liability company

C) A limited liability partnership

D) A sole proprietorship

44) Which of the following is NOT an essential characteristic of a limited liability company (LLC)?

A) The LLC can elect to be taxed as a partnership or a corporation.

B) Members' ownership interest is completely and freely transferable.

C) Members have limited liability for the obligations of the LLC.

D) The bankruptcy of one member does not dissolve the LLC.

45) Abe and Carlos want to form a general partnership. What must they do in order to create this legal form of business?

A) They must get a partnership license from the secretary of state.

B) They must sign a written agreement and file it with the secretary of state.

C) They must first orally agree to become partners and then formulate a contract.

D) They can start a partnership without any formalities.

46) Regarding the formation of a general partnership, which of the following is not a legal requirement but has been described as "highly desirable"?

A) A formal, written partnership agreement

B) An oral agreement

C) An exchange of mutual consideration

D) An agreement limiting the liability of the partners

47) A sole proprietorship lasts for how long if it continues to run unabated?

A) For 100 years

B) 10 years with an option to renew for another 10 years

C) Until the death of the owner

D) 30 years then the business has to be reformed

48) Which of the following is not a necessary element of the definition of partnership according to the RUPA?

A) Co-ownership of the business

B) Association of two or more persons

C) Limited liability of partners

D) Carrying on of a business

49) According to the RUPA:

A) partners have no liability for the obligations of the partnership.

B) a partnership cannot sue or be sued in its own name.

C) a partnership does not have a life apart from its owners.

D) partnerships have continuity of existence.

50) One of the two most important factors in establishing co-ownership of the business is:

A) making profits.

B) sharing management of the business.

C) encouraging voluntary relationships.

D) creating joint ventures.

51) A joint venture is a(n):

A) association limited to no more than two persons in business for profit.

B) enterprise of numerous co-owners in a nonprofit undertaking.

C) enterprise engaged in a single project.

D) association of persons engaged as co-owners in a single undertaking for profit.

52) A ________ is found when an arrangement is made not to establish an ongoing business involving many transactions, but is limited to a single project.

A) corporation

B) limited liability company

C) partnership

D) joint venture

53) Which of the following is NOT a consequence of being a partner of a partnership?

A) Partners are not liable for each other's torts.

B) Partners are agents of each other.

C) Each partner owns a portion of the value of the business.

D) Each partner owes a fiduciary duty to the partnership and to the other partners.

54) Which of the following is incorrect concerning a joint venture?

A) Joint ventures are limited to single projects.

B) Joint venturers are personally liable for its debts.

C) Joint ventures are created much like partnerships.

D) Joint venturers have more implied and apparent authority than do partners in a partnership.

55) If a third party deals with a person who appears to be the partner of another person, and the third party is harmed, it may recover damages under:

A) the doctrine of purported partners.

B) the general law for joint ventures.

C) the doctrine of direct liability.

D) the doctrine of respondeat superior.

56) Which of the following is not essential to the formation of a mining partnership?

A) Joint operation of the property

B) Joint ownership of a mineral interest

C) Active physical participation in operations

D) Sharing of profits and losses

57) Which of the following is true about the effect of purported partnerships?

A) Purported partners share profits of the business.

B) A purported partner does not have authority to make contracts for the partnership.

C) A purported partner is liable on contracts entered into by third parties on their belief that he is a partner.

D) A purported partner is not liable for the torts committed in the course of relationships entered by third parties who believed he was a partner.

58) In many public meetings, John has proclaimed himself to be an equal partner of Chan's partnership business. Chan's business ran into financial difficulties. John and Chan approached a creditor to obtain a loan. The creditor gave the loan based on a false presumption that John was a partner in the business too. Can John be made liable for the loan?

A) Yes, because John is a close acquaintance of Chan; thus, it is his ethical duty to help Chan during her financial trouble.

B) Yes, because John is a purported partner; public representations of his partner status make him personally liable for the debt.

C) No, because he is not legally a partner; the creditor should have checked the partnership agreement before advancing the loan.

D) No, because John did not participate in the business; he was thus not a member of the partnership business.

59) A partner's contribution is called ________.

A) partnership property

B) partnership liability

C) partnership cash flow

D) partnership capital

60) A loan made by a partner to a partnership business is:

A) a part of partnership capital.

B) a part of the partnership's assets.

C) a liability of the partnership business.

D) a partner's contribution to the partnership business.

61) A partner's ownership interest is called a ________.

A) partnership interest

B) shareholder interest

C) partnership liability

D) charging order

62) Mr. Olive and Mrs. Pickle enter into a partnership to provide IT consulting services. The name of the business is IT Doctor. From the partnership account, Mr. Olive purchases a laptop and a tablet for the business's use. Who owns the laptop and tablet?

A) Mr. Olive

B) Mrs. Pickle

C) The business IT Doctor

D) The government

63) An order charging all or part of the partner's transferable partnership interest with payment of the unsatisfied amount of the judgment is called a(n) ________.

A) interim charge

B) redeeming order

C) charging order

D) redeeming the charge order

64) A mining partner's interest is:

A) nontransferable.

B) freely transferable.

C) partially transferable.

D) dissolved and later, transferred.

65) The sale of a partner's transferable interest in a business entitles the buyer to what rights?

A) Distributions, like profit, that the selling partner was entitled to.

B) The right to inspect the partnership's accounting books.

C) The right to manage the partnership.

D) The right to represent the partnership in a legal proceeding.

66) The ________ business form is recognized not only in the United States, but also in Australia, Canada, Cyprus, England, India, Israel, Russia, South Africa, Turkey, Zimbabwe, and many other nations.

A) limited liability company

B) partnership

C) S corporation

D) professional corporation

67) Which of the following is not one of the aims of the RUPA?

A) To maintain a level of exclusivity to partnership status

B) To codify partnership law in one document

C) To make partnership law nearly consistent with itself

D) To attain uniformity throughout the country

68) As of December 2014, ________ states plus the District of Columbia and the Virgin Islands have adopted the RUPA.

A) 37

B) 24

C) 50

D) 44

69) Which of the following statements about the history of partnerships is false?

A) Partnerships were known in ancient Babylonia, ancient Greece, and the Roman Empire.

B) During the Middle Ages, much trade between nations was carried on by partnerships.

C) The definition of a partnership in the 6th-century Justinian Code of the Roman Empire varies greatly from that in our laws today.

D) English common law recognized the partnership by the close of the 17th century.

70) Which of the following would satisfy the RUPA's "for profit" requirement?

A) An endeavor carried on by several people for nonprofit objectives

B) An endeavor carried on by several people for charitable objectives

C) An enterprise suffered losses, yet the owners intended to make a profit

D) An enterprise made a profit, yet the owners intended to only break even

71) In the case in the text, Rasmussen v. Jackson, the court held that:

A) although Jackson and Rasmussen had joint property, this was not enough to create a partnership.

B) although Jackson and Rasmussen shared gross returns, this was not enough to create a partnership.

C) there was no evidence of a partnership.

D) although Jackson and Rasmussen shared profits, this was not enough to create a partnership.

72) Which of the following statements about limited liability partnerships (LLPs) is false?

A) The LLP's name must end with the acronym "RLLP."

B) The partners of an LLP must expressly agree to create an LLP by complying with an LLP statute.

C) The formation of an LLP requires filing a form with the secretary of state.

D) The formation of an LLP requires paying an annual fee.

73) A(n) ________ arises when a person misleads a second person into believing that the first person is a partner of a third person.

A) purported partnership

B) actual partnership

C) constructive partnership

D) notice partnership

74) The liability of a purported partner is based on:

A) substantial, detrimental reliance on the appearance of a partnership.

B) objectively reasonable reliance on the appearance of a partnership.

C) subjectively reasonable reliance on the appearance of a partnership

D) fairness of the representation.

75) Under the RUPA, a person will be a purported partner and have liability when three elements of section 308(a) are met. Which of the following is not one of those elements?

A) A person purports to be or consents to being represented as a partner of another person or partnership.

B) A third party relies on the representation.

C) A third party suffered actual, tangible harm.

D) A third party transacts with the actual or purported partnership.

76) In MP Nexlevel of Cal., Inc. v. CVIN, the case in the text, the court held that:

A) CVIN and CENIC were in a legal partnership because they filed a joint application for grant funding.

B) CVIN and CENIC were not in a legal partnership.

C) CVIN and CENIC were in a legal partnership because they represented on grant forms that they were in a "public-private partnership."

D) CVIN and CENIC were in a legal partnership because they jointly built, operated, and maintained the project.

77) When a partnership is formed, partners contribute cash or other property to the partnership, this is called:

A) partnership property.

B) partnership liability.

C) partnership cash flow.

D) partnership capital.

78) Mike, Randy, and Steve are partners of a partnership. Mike and Steve loan the partnership $10,000 each. Which of the following statements is true?

A) Randy is a debtor of the partnership.

B) Mike and Steve are the sole owners of the partnership.

C) Mike and Steve are both owners and creditors of the partnership.

D) Mike, Randy, and Steve are all owners and creditors of the partnership.

79) Loans made by partners to a partnership are:

A) partnership property.

B) partnership capital.

C) partnership cash flow.

D) partnership liabilities.

80) According to the RUPA's rules that determine when property is acquired by a partnership, which of the following statements is false?

A) Property belongs to the partnership if the property is transferred to the partnership in its name.

B) Property belongs to the partnership if the property is transferred to any partner acting as a partner by a transfer document that names the partnership.

C) Property belongs to the partnership if the property is purchased with a partner's funds.

D) Property belongs to the partnership if the property is transferred to any partner by a transfer document indicating the partner's status as a partner or that a partnership exists.

81) Which of the following controls whether the partnership or an individual owns the property?

A) Intent of the partners

B) Invoices

C) Whether the property is commonly used for the type of business

D) The function of the property

82) To remove all ambiguity regarding ownership of property used by a partnership, the partners should come to an agreement regarding property ownership and put such an agreement:

A) in a filing with the secretary of state.

B) in a partnership agreement.

C) in a contract in compliance with the statute of frauds.

D) in an exculpatory clause.

83) As demonstrated in the case in the text, Finch v. Raymer, the presumption is very strong that:

A) property purchased with partnership funds belongs to the partners on a pro rata basis.

B) property purchased with partnership funds and used in the partnership belongs to the partnership.

C) property purchased with partnership funds and used in the partnership belongs to the partner that initiated the transaction.

D) property purchased with partnership funds and used in the partnership belongs to the partnership, as long as the property is titled to the partnership.

84) Which of the following statements about a partner's partnership interest is false?

A) The RUPA gives ownership of partnership property to the partners.

B) A partner's partnership interest includes his transferable interest.

C) A partner has no individual ownership rights in partnership property.

D) Partners have the right to use partnership property for partnership purposes.

85) Which of the following statements about a transfer of a partner's transferable interest is true?

A) The transfer entitles the transferee to become a partner of the partnership.

B) The transferee has become the creditor of the transferable interest.

C) The transferee can ask a court to dissolve and wind up the partnership, but only if the partnership is at will.

D) The transferee has the right to inspect the partnership's books and records.

86) Babs, Mindy, and Eric decide to leave a large accounting firm and start their own accounting business. What form of business should they elect?

87) Selena joins Kona's management consulting business. They do not indicate whether Selena is Kona's partner, but Selena receives 34 percent of the profits of the business and makes decisions regarding which clients the business should accept. Two years later, Selena leaves the business to start a singing career. Selena claims she owns a portion of the value of the business. Is Selena correct?

88) Dr. Matt Fornfeld, a physician practicing as a sole proprietor, falls behind on his payments to First Bank, a creditor to whom he owes $275,000. First Bank agrees to take reduced payments from Matt, but wants more money if Matt's practice becomes more profitable. Matt agrees to pay First Bank at least $4,000 per month up to a maximum of 15 percent of his profits. Does this agreement make First Bank a partner with Matt?

89) Jane and Ridge are partners in a computer animation firm. Jane retires from the firm, but tells Ridge that he can leave her name on the entrance door to the firm and in the telephone listing. Alex, a new client, visits the firm after telephoning the firm. Alex has seen Jane's name listed in the phone book along with Ridge's and the firm's names. He also sees Jane's name on the entrance door to the firm. Believing Jane is a partner with Ridge, Alex contracts to have the firm develop animation for his upcoming film. Ridge, however, never performs the contract. Alex sues Ridge and Jane. Is Jane liable to Alex?

90) Sue transferred her transferable interest of the partnership business to her creditor to discharge her debt. However, Sue is an efficient manager and she still manages the business, even after the transfer. Is she still a partner?