Chapter 33 Sole Proprietornships and Partnerships

Multiple Choice
Identify the letter of the choice that best completes the statement or answers the question.

____ 1. Amy wants to go into the business of construction contracting. Among the reasons that would probably convince Amy to set up her business as a sole proprietorship would be
a. its greater organizational flexibility.
b. its limited liability.
c. its perpetual existence.
d. the ease of transferring the business to other family members.

____ 2. Tom owns ABC Enterprises, a sole proprietorship. In a sole proprietorship, the liability of the owner is
a. unlimited.
b. limited to the amount of his or her original investment.
c. limited to the amount of his or her original investment plus any subsequent capital expenditures.
d. limited by state statute and varies from state to state.

____ 3. Adam, the owner of Adam's Apples, a sole proprietorship, wishes to increase his business capital while maintaining control. This objective can best be accomplished by
a. issuing stock.
b. borrowing funds.
c. bringing in partners.
d. selling the business.

____ 4. Great Games, a firm that specializes in the research and development of computer games, is operated as a partnership. Much of the law that governs the operation of partnerships is based on principles of
a. agency law.
b. constitutional law.
c. contract law.
d. sales law.

____ 5. Earl runs a livestock breeding business and owes the Circle R Ranch $1,000. Earl agrees to pay the Circle R a percentage of his profits each month until the debt is paid. Because of this agreement, the Circle R is Earl's
a. creditor only.
b. partner only.
c. creditor and partner.
d. none of the above.

Fact Pattern 33-1
Greg starts up a print shop in a building owned by Marsha. Their lease agreement provides that Greg will pay Marsha a base monthly rental of $250, plus 30 percent of the month's profits. The term of the lease is two years.

____ 6. Refer to Fact Pattern 33-1. Greg hires Jordan to work at the customer service desk in the print shop. Greg agrees to pay her an hourly wage of $8.00 plus a commission equal to 10 percent of the profits. Jordan is to be paid twice a month. Greg and Jordan are
a. partners in a partnership for the term of the employment.
b. not partners, because Jordan does not have an ownership interest or management rights in Greg's print shop.
c. not partners, because Greg must pay an hourly wage in addition to a share of the profits.
d. not partners, because Jordan receives a "base wage" of $8.00 per hour.

____ 7. Refer to Fact Pattern 33-1. Greg and Marsha are
a. partners in a partnership for the term of the lease.
b. not partners, because Marsha does not have an ownership interest or management rights in Greg's print shop.
c. not partners, because of the lease requirement that Greg must pay a "base rental" in addition to a share of the profits.
d. none of the above.

____ 8. Bill and Carol are the only partners in an accounting firm. Regarding bankruptcy, the partnership can be treated as
a. an aggregate.
b. an entity.
c. a partner.
d. none of the above.

____ 9. Bayside Restaurant is operated as a partnership. For tax purposes, Bayside
a. is required to file an information return but is not a tax-paying entity.
b. is a tax-paying entity.
c. pays 1/2 of the taxes if there are two partners.
d. pays 1/4 of the taxes if there are three partners.

____ 10. Owen and Paula agree to operate an espresso stand. They purchase their supplies and split the costs equally. They agree to share profits equally, and decide that each of them will have an equal say in how the stand will operate. Nothing is put in writing. Owen and Paula have formed
a. a partnership.
b. a sole proprietorship.
c. a type of business firm that is not a partnership or a sole proprietorship.
d. nothing because their agreement was not reduced to writing.

____ 11. Edward and Mark agree over the phone to go into business as partners. The fact that they have not yet reduced their agreement to a writing will
a. have no effect on the formation of their partnership.
b. prevent them from holding themselves out as partners.
c. violate the Statute of Frauds.
d. none of the above.

____ 12. Al and Betty agree while talking on the telephone to form a partnership. Their partnership agreement is legally binding
a. only if it is subsequently reduced to writing.
b. only if one of them gives valid consideration to the other.
c. without any further measures.
d. none of the above.

____ 13. Pete and Andy sign a five-year partnership agreement. At the end of the fifth year, they decide to continue working together. This partnership will be terminable
a. at will by either partner.
b. only after the passage of an additional five-year term.
c. only if either partner withdraws from it.
d. none of the above.

____ 14. Derrick holds himself out as the managing partner of Wembley Group, a partnership, even though Derrick has no actual connection to Wembley. Derrick obtains a personal loan based on this misrepresentation. Derrick's default on the loan will result in
a. Derrick being held solely liable for the amount of the obligation.
b. the Wembley Group being held solely liable for the amount of the obligation.
c. Derrick and the Wembley Group being held jointly liable.
d. none of the above.

____ 15. Larry, Shary, and Mike are partners in Pan Pan, a pizza restaurant. Mike contributes 75 percent of the capital. The partners agree to split the profits equally. When Pan Pan proves unprofitable, the partners decide to dissolve the partnership. Pan Pan's liabilities are greater than its assets. Who pays for the losses?
a. Mike because he contributed most of the capital
b. Shary and Larry because they contributed the least of the capital
c. All of the partners in proportion to their capital contributions
d. All of the partners in proportion to their shares of the profits

____ 16. Doug and Erin are partners in Ace Athletic Supplies, which sells sports equipment. In general, a partner who devotes his time and energy to partnership business will
a. be entitled to compensation if he or she is an equity partner.
b. be entitled to compensation if the partnership agreement is silent.
c. not be entitled to compensation if the partnership agreement is silent.
d. none of the above.

____ 17. Roberta is a junior partner in an accounting firm. As a partner, she has a right of inspection that permits her to review
a. the attire worn by the staff.
b. partnership books and records.
c. the tax returns filed by other partners.
d. any client files.

____ 18. Alvin and Cleo form a partnership to operate the Four Seasons Hotel. When Alvin suspects Cleo of failing to account for all of the receipts, Alvin sues Cleo for an accounting and a dissolution. The court will likely order
a. an accounting only.
b. a dissolution only.
c. an accounting and a dissolution.
d. none of the above.

____ 19. 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
a. Stacey's profits as a partner.
b. Stacey's interest in partnership assets if the firm dissolves.
c. both a and b.
d. none of the above.

____ 20. June and Sue are partners in a computer business that is in the process of dissolution. Both wish to keep a certain desk lamp after the business is wound up. Because Sue paid for the lamp with partnership funds, she
a. is entitled to the lamp only if it was originally June's idea to buy it.
b. is entitled to the lamp only if it was originally her idea to buy it.
c. has no preference over June regarding the ownership of the lamp.
d. none of the above.

____ 21. Erica is a partner is a medical firm and applies for a loan with a bank on behalf of the partnership without the authorization of the other partners. If the bank knows that Erica is not authorized to take out loans on behalf of the partnership, then
a. the partnership alone will be liable for repayment.
b. Erica alone will be liable for repayment.
c. the partnership and Erica will be jointly liable for repayment .
d. the partnership and Erica will be jointly and severally liable for repayment.

____ 22. Hugh and Cray are partners in Silver Development, a partnership formed to build and sell Twin Towers, an office and retail-shopping complex. Without Hugh's knowledge, Cray engages in fraud on behalf of Silver that results in Silver's default on several bank loans. Regarding the unpaid loans, Hugh is
a. not responsible under any circumstances.
b. not responsible unless he attempts to declare bankruptcy.
c. responsible.
d. none of the above.

____ 23. Ben is admitted to an existing partnership. Several debts and obligations incurred prior to the date of his admission become due. Ben is
a. personally liable for those debts and obligations.
b. liable for those debts and obligations only up to the amount of his capital contribution.
c. not required to contribute any money to the satisfaction of these debts and obligations.
d. none of the above.

Fact Pattern 33-2
Bob, Maria, Carlos, and Linda are general partners in a medical practice. When the area surrounding their clinic is redeveloped, many of their patients move away and their revenues decline.

____ 24. Refer to Fact Pattern 33-2. Bob's completion of the process of collecting and distributing the partnership's assets will result in
a. the dissolution of the partnership.
b. the termination of the partnership's legal existence.
c. the temporary suspension of partnership activity.
d. none of the above.

____ 25. Refer to Fact Pattern 33-2. Maria's withdrawal from the partnership will result in
a. the dissolution of the partnership.
b. the termination of the partnership's legal existence.
c. the temporary suspension of partnership activity.
d. none of the above.

____ 26. Refer to Fact Pattern 33-2. A decision by some of the partners, without the consent of the others, to admit Phil, a recent medical school graduate, to the partnership will result in
a. the dissolution of the partnership.
b. the termination of the partnership's legal existence.
c. the temporary suspension of partnership activity.
d. none of the above.

____ 27. Refer to Fact Pattern 33-2. Carlos's transfer of his partnership interest to Doris, his creditor, will result in
a. the automatic dissolution of the partnership.
b. the termination of the partnership's legal existence.
c. the temporary suspension of partnership activity.
d. none of the above.

____ 28. Roberta and Joyce are photographers. Roberta wants to climb Mount Everest. Joyce wants to explore the Amazon River. They agree to form RJ Photography, a partnership, specifically to obtain the funds to finance their respective expeditions. RJ will be dissolved as soon as
a. the partners have obtained sufficient funds to pay for their expeditions.
b. Roberta has climbed Mount Everest.
c. Joyce has finished her exploration of the Amazon River.
d. either Roberta or Joyce has decided to cancel her expeditionary plans.

Fact Pattern 33-3
Roy and Rex form a partnership and state in their agreement that the surviving partner shall continue the business of the partnership with the decedent partner's estate. The sole asset of the partnership is a specialized hot-dog pushcart.

____ 29. Refer to Fact Pattern 33-3. Rex dies three years later. The partnership
a. continues to operate as provided by the agreement.
b. becomes a sole proprietorship.
c. is dissolved.
d. none of the above.

____ 30. Refer to Fact Pattern 33-3. One year later, the state legislature enacts a law prohibiting the sale of food from pushcarts. The partnership
a. continues to operate as provided by the agreement.
b. becomes a sole proprietorship.
c. is dissolved unless the partners change the nature of their business and continue the partnership.
d. none of the above.

____ 31. Refer to Fact Pattern 33-3. Roy becomes insolvent two years later. The partnership
a. continues to operate as provided by the agreement.
b. becomes a sole proprietorship.
c. is dissolved unless the partners change the nature of their business and continue the partnership.
d. none of the above.

____ 32. Ira and Jeff are partners in Landsea Distributors, a firm that exports certain electronic equipment to a small country in Europe. When the United States government declares that the equipment is militarily sensitive and can no longer be exported, the partnership dissolves
a. as soon as Ira and Jeff agree that it is dissolved.
b. as soon as Ira and Jeff change their citizenship.
c. by operation of law unless Ira and Jeff decide to change the nature of their business and continue in the partnership.
d. none of the above.