Partnership Set

Question 1

Which of the following is required to form a partnership?

A A written partnership agreement.

B Intent to form a partnership.

C At least two persons.

D Contributions to partnership capital.

Answer 1

C

Under the Revised Uniform Partnership Act (“RUPA”), a partnership is an association of two or more persons to carry on as co-owners a business for profit. Although the partners need not intend to form a partnership, they must intend to carry on as co-owners of a business for profit. A writing is not required; a partnership can be formed by conduct (i.e., associating to form a business for profit). Partner contributions to partnership capital are not required to form a partnership.

Question 2

Which of the following factors raise a presumption that a partnership has been formed?

A Sharing of profits.

B Designation by the parties of the entity as a partnership.

C Sharing of gross returns.

D Joint or common tenancies of property.

Answer 2

A

Under the Revised Uniform Partnership Act (“RUPA”), a person who receives a share of the profits of a business is presumed to be a partner. Designation by the parties of the entity as a partnership, the sharing of gross returns, and joint or common tenancies of property are indicative of the intent to form a partnership, but they are not conclusive.

Question 3

A transfer of a partner’s transferable interest in a partnership entitled the transferee to:

A Become involved in the management or administration of the partnership business or affairs.

B Demand an accounting of partnership transactions.

C Inspect the partnership books.

D Receive distributions to which the transferring partner would otherwise be entitled.

Answer 3

D

As against the other partners, in the absence of an agreement, a transfer of a partner’s transferable interest entitles the transferee to receive, in accordance with his contract, distributions to which the transferring partner would otherwise be entitled. A transferee is not entitled to become involved in the management or administration of the partnership business or affairs, demand an accounting of partnership transactions, or to inspect the partnership books.

Question 4

Which of the following statements regarding a partner’s right to participate in management of the partnership is correct?

A Decisions regarding matters within the ordinary course of partnership business require the consent of all partners, but matters outside the ordinary course of partnership business may be controlled by a majority vote of all the partners.

B Decisions regarding matters within the ordinary course of partnership business may be controlled by a majority vote of all the partners, but matters outside the ordinary course of partnership business require the consent of all partners.

C Decisions regarding matters both within and outside the ordinary course of partnership business require the consent of all partners.

D Decisions regarding matters both within and outside the ordinary course of partnership business may be controlled by a majority vote of all the partners.

Answer 4

B

Decisions regarding matters within the ordinary course of partnership business may be controlled by a majority vote of all the partners, but matters outside the ordinary course of partnership business require the consent of all partners.

Question 5

Which of the following statements regarding remuneration of a partner is correct?

A A partner is entitled to remuneration for all services rendered.

B A partner is not entitled to remuneration for any services rendered.

C A partner is not entitled to remuneration except for services rendered in winding up the partnership’s business.

D A partner is entitled to remuneration for all services rendered except for those services rendered in winding up the partnership’s business.

Answer 5

C

Absent an agreement to the contrary, a partner is not entitled to remuneration except for reasonable compensation for services rendered in winding up the partnership’s business.

Question 6

Which of the following statements regarding apparent authority is true?

A Apparent authority is the authority that a third party would reasonably believe a partner has based on his being held out by the partnership as a partner.

B Apparent authority is the authority a partner reasonably believes he has based on the communications between the partnership and the partner.

C A partner’s apparent authority is limited to transactions that are within the ordinary course of business.

D A partner’s unauthorized act apparently carrying on in the ordinary course of partnership business will bind the partnership even if the person with whom the partner was dealing knew that the partner lacked authority.

Answer 6

A

Apparent authority is the authority that a third person would reasonably believe a partner has based on his being held out by the partnership as a partner. The act of any partner apparently carrying on in the ordinary course of the partnership business (or business of the kind carried out by the partnership) binds the partnership unless the partner had no authority to act for the partnership in the particular matter, and the person with whom the partner was dealing knew or had received notification that the partner lacked authority. Actual authority is the authority a partner reasonably believes he has based on the communications between the partnership and the partner.

Question 7

Under the RUPA how long does a partnership continue to exist after dissolution?

A The partnership continues until a statement of dissolution is filed with the secretary of state.

B The partnership continues until winding up of the business is complete.

C The partnership continues for 90 days after a statement of dissolution is filed with the secretary of state.

D The partnership continues for 120 days after a statement of dissolution is filed with the secretary of state.

Answer 7

B

Under RUPA, after an event of dissolution occurs, a partnership continues until the winding up of business is completed, at which time the partnership is terminated. A statement of dissolution does not end a partnership. The partnership will be bound by a partner’s post-dissolution acts where the party with whom the partner dealt did not have notice of the dissolution. If a partner files a statement of dissolution with the secretary of state, third parties will be deemed to have notice of the dissolution 90 days after it is filed.

Question 8

With respect to limited partnerships, which of the following statements regarding a general partner’s liability is not true?

A General partners are jointly and severally liable for all obligations of the partnership.

B General partners are not personally liable on partnership obligations if the limited partnership is also a limited liability partnership.

C Incoming general partners are not personally liable for any partnership obligation incurred before they became general partners.

D General partners are not personally liable for the obligations of the partnership beyond their agreed-upon contributions.

Answer 8

D

General partners may be personally liable for obligations of the partnership beyond their agreed-upon contributions. General partners are jointly and severally liable for all obligations of the limited partnership, unless the limited partnership is also a limited liability partnership. In that case, any liability incurred belongs to the partnership alone, and the general partners are not personally liable on the obligation. Incoming general partners are not personally liable for any partnership obligations incurred before they became general partners. General partners may be personally liable for obligations of the partnership beyond their agreed-upon contributions.

Question 9

The ULPA grants certain rights to general and limited partners. Which of the following riots is exclusive to general partners?

A The right to manage the limited partnership’s activities.

B The right to information.

C The right to distributions.

D The right to assign the partner’s interest in the partnership.

Answer 9

A

The ULPA’s grant of management rights is exclusive to general partners. However, as a matter of contract, the partnership agreement may allocate the right to manage or control the partnership to limited partners. Both general and limited partners are granted the right to information, although the right is not identical. Furthermore, both general and limited partners are granted the right to distributions and to assign the partner’s interest in the partnership.

Question 10

Under the RULLCA which of the following is necessary to form a LLC?

A At least two members.

B The filing of a certificate of organization with the secretary of state.

C An operating agreement.

D A formal election to be taxed as a corporation or partnership.

Answer 10

C

An LLC is formed by filing a certificate of organization with the secretary of state. An LLC can be formed with one member. An LLC may, but need not, adopt an operating agreement to control most aspects of the LLC’s business and management. Unless an LLC requests to be taxed as a corporation, it will receive partnership tax treatment. Thus, an LLC need not make a formal election to be taxed as a corporation or a partnership.

Question 11

Generally, a member of a LLC may bring a derivative action on behalf of the LLC if:

A She has been personally injured by the LLC.

B She has made an unsuccessful demand on the LLC’s management to enforce the right at issue.

C She is a member of the LLC at some point in time during the course of the action.

D She is a member in a member-managed LLC.

Answer 11

B

Members of an LLC, whether member-managed or manager-managed, may bring a derivative action to enforce a right of the LLC. The member first must make a demand on the other members or the managers (depending on how the LLC is managed), unless demand would be futile. If the members or managers do not bring an action within a reasonable time, then the demanding member may bring the derivative action. A derivative action may be maintained only by a person who is a member of the LLC at the time the action is commenced and who remains a member while the action continues. If a member has been personally injured by her LLC, she may bring a direct action against the LLC to recover, not a derivative action.

Question 12

Under the Revised Uniform Partnership Act, which of the following statements regarding lawsuits involving a partnership is correct?

A A partnership may sue or be sued only in the partnership name.

B Suits by and against the partnership must name the individual partners.

C A partnership may sue or be sued in the names of the individual partners.

D Partners may not be sued in their individual capacity.

Answer 12

C

A partnership may sue or be sued in the partnership name or in the names of the individual partners, or both.

Question 13

Under the Revised Uniform Partnership Act, which of the following provisions may be waived in a. partnership agreement?

A The right to inspect the books and records of the partnership.

B The power to dissociate as a partner.

C The equal sharing of profits and losses.

D A partner’s duties of loyalty and care.

Answer 13

C

Each partner is entitled to an equal share of the partnership profits and must contribute towards the partnership losses in proportion to his share of the profits, but this rule may be modified in a partnership agreement. Under RUPA, partners are free to adopt a partnership agreement governing the relationships among themselves, and RUPA will govern only those issues not provided for in the agreement. However, certain provisions of RUPA may not be waived in an agreement, including a partner’s right to access the books and records of the partnership, the power to dissociate as a partner, and a partner’s duties of care and loyalty.

Question 14

The absence of an agreement to share losses is:

A Necessary to create a partnership.

B Not permitted by the Revised Uniform Partnership Act (“RUPA”).

C Evidence that the parties did not intend to form a partnership.

D Evidence that the parties intended to form a partnership.

Answer 14

C

While there is no requirement under RUPA that sharing losses is necessary to create a partnership, the absence of an agreement to share losses is evidence that the parties did not intend to form a partnership.

Question 15

Under the doctrine of partnership by estoppel, even though there is no partnership agreement and the parties as between themselves are not partners, they may be held liable to third parties as if they were partners. This issue is likely to arise when a person:

A Represents herself as a partner and another partner extends credit to her.

B Fails to deny partnership status when named by another in a statement of authority.

C Fails to file a statement of dissociation after leaving a partnership.

D Holds another person out to be her partner.

Answer 15

D

Partnership by estoppel arises when a person, by words or conduct: (i) represents herself as a partner or consents to being represented by another as a partner, and a third party extends credit to the actual or apparent partnership in reliance on the representation; or (ii) holds another person out to be her partner, making the alleged partner her agent with the power to bind her to third parties as if the other were, in fact, a partner. (Note that answer (A) is incorrect because the partner extending credit to the person representing herself as a partner should know that the latter is not actually a partner.) A person held out by another as a partner is not liable as a partner unless she actually consents to the holding out; mere failure to deny a representation of partnership does not give rise to liability as a purported partner. Thus, the mere fact that one fails to deny partnership status when named by another in a statement of authority, or a partner’s failure to file a statement of dissociation after leaving the partnership, does not alone give rise to liability as a purported partner.

Question 16

Titled property is deemed or presumed to be partnership property unless it is:

A Titled in the partnership name.

B Titled in the name of one or more partners and the instrument transferring title notes the titleholder’s capacity as a partner or the existence of a partnership.

C Purchased with partnership funds.

D Titled in the name of one or more partners.

Answer 16

D

It is not enough for title to be in the name of one or more partners for the property to be deemed partnership property. Under the Revised Uniform Partnership Act, titled property is deemed to be partnership property if it is titled in the partnership name, or it is titled in the name of one or more partners and the instrument transferring title notes the titleholder’s capacity as a partner or the existence of a partnership. Property is rebuttably presumed to be partnership property if it was purchased with partnership funds (i.e., cash and credit), regardless of in whose name title is held.

Question 17

Which of the following statements regarding a partner’s interest in the partnership is correct?

A A partner may transfer his interest in partnership property.

B A partner may transfer his interest in management.

C A partner may transfer his interest in profits, losses, and distributions.

D A partner is prohibited from transferring any interest he has in the partnership.

Answer 17

C

Each partner has a transferable interest in the partnership, which consists of a right to receive his share of the profits and losses and the right to receive distributions. A partner is not a co-owner of partnership property and has no interest in partnership property. As such, a partner cannot transfer his interest in individual items of partnership property or use partnership property for personal purposes. Furthermore, a partner may not transfer his interest in management.

Question 18

Pursuant to the duty of loyalty, a partner must do all of the following except:

A Account for profits, property, opportunities, or other benefits derived by the partner in conjunction with partnership business.

B Refrain from engaging in grossly negligent or reckless conduct, intentional misconduct, or knowing violation of the law.

C Refrain from dealing with the partnership as, or on behalf of, a party having an interest adverse to the partnership.

D Refrain from competing with the partnership.

Answer 18

B

Partners have a duty to refrain from engaging in grossly negligent or reckless conduct, intentional misconduct, or knowing violation of the law, but this duty is part of the duty of care rather than the duty of loyalty. Partners owe the partnership and other partners the duty of loyalty. This duty is threefold: (i) to account for profits, property, opportunities, or other benefits derived by the partner in conjunction with the partnership business; (ii) to refrain from dealing with the partnership as, or on behalf of, a party having an interest adverse to the partnership; and (iii) to refrain from competing with the partnership.

Question 19

Which of the following statements regarding actual authority of a partner is true?

A If the partnership agreement authorizes a partner to act, no further action is required for a partner to act.

B A partner is prohibited from taking any action that is not specifically authorized by the partnership agreement.

C A partner has actual authority to act on behalf of the partnership by virtue of being a partner.

D Unanimous consent is required to grant a partner actual authority to act on behalf of the partnership in all cases.

Answer 19

A

A partnership will be bound by an act of a partner if the partner has actual authority. One way that actual authority can be granted is in the partnership agreement. If the agreement authorizes a partner to act, no further action is required for a partner to act. Actual authority also can be granted by the consent of the partners. Generally, a majority vote of the partners is all that is needed to grant a partner actual authority. However, for acts outside the ordinary course of business, the unanimous vote of the partners is required. A partner does not have actual authority to act on behalf of the partnership simply by virtue of being a partner (although a partner may have apparent authority to carry on business apparently within the scope of partnership business by virtue of being a partner).

Question 20

A partner is liable for each of the following except:

A Crimes committed by a co-partner within the scope of partnership business of which the partner had knowledge.

B Torts committed by a co-partner or an employee of the partnership within the scope of partnership business.

C Contracts made by a co-partner within the scope of partnership business.

D Frauds committed by a co-partner in the course of partnership business, even if the other partners have no connection with, knowledge of, or participation in the fraud.

Answer 20

A

A partner is not criminally responsible for crimes committed by a co-partner unless the partner participated in the commission of the crime as a principal or accessory. A partner is liable for any torts committed by a copartner or by an employee of the partnership within the ordinary scope of partnership business or with authority of the partnership, including any fraud—even if the partner has no connection with, knowledge of, or participation in the fraud. Additionally, a partner is liable on contracts made by a co-partner within the scope of partnership business, as well as any other contracts expressly authorized by the partners.

Question 21

Which of the following regarding a partner’s liability is not true?

A Partners are jointly and severally liable for all obligations of the partnership.

B Partners are personally and individually liable for the entire amount of all partnership obligations.

C Incoming partners are not personally liable for any partnership obligation incurred before their admission to the partnership.

D Outgoing partners cease to be personally liable for any obligations incurred by the partnership while members 90 days after they leave the partnership.

Answer 21

D

An outgoing partner remains liable on all obligations incurred by the partnership while a member of the partnership, unless there has been payment, release, or novation, or the creditor has agreed to a material alteration in the obligation without the partner’s consent. Thus, it is not true that an outgoing partner’s liability automatically ends 90 days after leaving the partnership. All partners are jointly and severally liable for all obligations of the partnership, whether they arise in contract or tort. As such, an action may be brought against any one or more of the partners or the partnership. Moreover, each partner is personally and individually liable for the entire amount of all partnership obligations. An incoming partner is not personally liable for any partnership obligation incurred before her admission to the partnership, although the incoming partner’s contributions to the partnership may be used to satisfy existing partnership obligations.

Question 22

Which of the following is not a consequence of a partner’s dissociation?

A If the partnership continues, the partnership must buy out the dissociated partner’s interest.

B The dissociated partner is not liable for any obligation incurred after dissociation.

C The dissociated partner’s right to participate in management ceases.

D The dissociated partner generally remains liable for obligations incurred by the partnership before dissociation.

Answer 22

B

Dissociation is a change in relationship of the partners caused by any partner ceasing to be associated in the carrying on of the business. The dissociated partner generally remains liable for obligations incurred by the partnership before the partner’s dissociation, and also after the dissociation if the other party to the transaction: (i) reasonably believed when entering the transaction that the dissociated partner was still a partner, and (ii) did not have notice of the partner’s dissociation. When a partner dissociates, the partner’s right to participate in management ceases. If the partnership business continues after a partner dissociates, the partnership must buy out the dissociated partner’s interest.

Question 23

A partner’s dissociation will necessarily be considered wrongful in each of the following situations except:

A When the partner becomes bankrupt before the end of the partnership term or completion of the undertaking.

B When a court decides that the partner is incapable of performing a partner’s duties.

C When the partnership is for a definite term or particular undertaking and the partner withdraws before the term ends or the undertaking is completed.

D When the partner is expelled from the partnership before the end of the partnership term or completion of the undertaking.

Answer 23

B

The decision of a court that the partner is incapable of performing a partner’s duties is an event of dissociation, but it is not necessarily a wrongful dissociation. A partner will be deemed to have wrongfully dissociated if the dissociation is in breach of an express term of the partnership agreement; or the partnership is for a definite term or a particular undertaking and the partner withdraws, is expelled, or becomes bankrupt before the end of the term of completion of the undertaking.

Question 24

Under the RUPA which of the following statements regarding dissolution is correct?

A After dissolution, a partnership ceases to be bound by a partner’s acts.

B A partner who wrongfully dissolves a partnership may be entitled to wind up the affairs of the partnership.

C After a partnership is dissolved, its liabilities must be paid in the following order: first to creditors (including partners who are creditors), then to partners in settlement of their accounts.

D Any time after dissolution and before winding up is completed, the partners may decide by majority vote to continue the partnership business.

Answer 24

C

After a partnership is dissolved and its assets are reduced to cash, the cash must be used to pay its liabilities in the following order under RUPA: first to creditors (including partners who are creditors), then to partners in settlement of their accounts. A partnership will be bound by a partner’s act after dissolution if the act is appropriate for winding up the partnership (e.g., settling claims, selling partnership assets, collecting debts, paying creditors), A partner who wrongfully dissolves a partnership is not entitled to wind up the affairs of the partnership. Any time after dissolution and before winding up is completed, the partners may decide to continue the partnership business, but they must do so by unanimous vote.

Question 25

Which of the following statements is true regarding a way in which limited liability partnerships and general partnerships are similar?

A Partners of both entities have the same financial rights and obligations.

B Both entities must file a statement of qualification with the secretary of state.

C Partners of both entities are personally liable for any obligations of the partnership.

D Both entities have the same naming requirements.

Answer 25

A

Financial rights and obligations of partners in an LLP, including profit/loss sharing and indemnity, are identical to those of general partners. To become an LLP, a partnership must file a statement of qualification with the secretary of state; general partnerships may, but need not, file a statement of partnership authority with the secretary of state. The major advantage of operating as an LLP is that the partners are not personally liable for the obligations of the partnership, whether arising in contract, tort, or otherwise; on the contrary, general partners are personally liable for such obligations. The LLP name must end with the words “Registered Limited Liability Partnership” or “Limited Liability Partnership,” or the abbreviation “R.L.L.P,” “L.L.P.,” “RLLP,” or “LLP”; a general partnership has no specific naming requirements.

Question 26

With respect to limited partnerships, which of the following statements regarding limited partners is true?

A A limited partner is personally liable for obligations of the limited partnership only if he participates in management or control of the partnership.

B A limited partner is personally liable for all obligations of the limited partnership, no matter the circumstances.

C A limited partner is not personally liable for obligations of the limited partnership under any circumstances.

D A limited partner is personally liable for obligations of the limited partnership if he also is a general partner.

Answer 26

D

A limited partnership is composed of at least one general partner and one limited partner. The general partners (including limited partners who also are general partners) are personally liable for partnership obligations, while the limited partners are not personally liable for partnership obligations solely by reason of being limited partners. This means that limited partners are not personally liable even if they participate in the management or control of the partnership.

Question 27

A limited partnership may be dissolved in any of the following ways except:

A By judicial dissolution.

B By administrative dissolution.

C With the consent of all general partners; the consent of the limited partners is not needed.

D Upon the happening of an event specified in the partnership agreement.

Answer 27

C

The consent of all general partners and of the limited partners holding a majority of the right to receive distributions (“majority in interest”) is required to dissolve a limited partnership. A limited partnership may be judicially dissolved upon application of a partner if it is no longer reasonably practicable to carry on the limited partnership in conformity with the partnership agreement. Additionally, a limited partnership may be administratively dissolved by the secretary of state for failure to pay fees or file an annual report. (Note, however, that the partnership may apply for reinstatement by curing the defect within two years of the dissolution.) Upon the happening of an event specified in the partnership agreement, the limited partnership also will be dissolved.

Question 28

Under the Uniform Limited Partnership Act, the name of a limited partnership ____________________ contain ____________________.

A Must; the name of any general partner.

B May; the name of any limited partner.

C May; the words “limited partnership” or the abbreviation “L.P.”

D May not; the name of any partner, whether general or limited.

Answer 28

B

A limited partnership name may contain the name of any partner, whether general or limited, and must contain the words “limited partnership” or the abbreviation “L.P.” unless the limited partnership is a limited liability limited partnership, in which case that must be reflected in the name (e.g., “L.L.L.P.”).

Question 29

Under the RULLCA which of the following statements is correct regarding the management of a limited liability company?

A It is presumed that members will manage an LLC.

B It is presumed that managers will manage an LLC.

C It is presumed that each member will have voting strength proportionate to his ownership interest.

D It is presumed that each manager will have voting strength proportionate to his capital contribution.

Answer 29

A

Under RULLCA, management of an LLC is presumed to be by all members. Other management arrangements can be made (e.g., management by only some of the members or by outside managers), but they must be specified in an operating agreement. Each member (or manager, if the LLC is manager-managed) has equal rights in the management and conduct of the LLC unless otherwise agreed.

Question 30

With respect to the LLC a court will pierce the veil of incorporation in each of the following circumstances except when an LLC:

A Fails to observe formalities.

B Is the alter ego of the members or managers.

C Is inadequately capitalized at its inception.

D Was formed to perpetrate a fraud.

Answer 30

A

A court may piece an LLC’s veil of limited liability under circumstances similar to those under which courts pierce the veil of a corporation: (i) where the LLC is the alter ego of the member(s) or manager(s); (ii) for inadequate capitalization at the inception of the LLC; or (iii) if the LLC was formed to perpetrate a fraud. Because LLCs can be run with fewer formalities than a corporation, the failure to observe formalities is not a ground for piercing an LLC.