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Thank you for taking our Pop Quiz #137: BEC: Business structure: Sole Proprietorships & General and Limited Partnerships. Following are the answers and rationales.

A parent and child currently own and operate a farm as equal partners. Under the Revised Uniform Partnership Act, what effect would the death of the parent have on the partnership?

A. The estate of the deceased partner automatically becomes a partner.

B. The surviving partner could continue the partnership.

C. The partnership would be dissolved and wound up.

D. A partnership agreement could not have governed the continuation of the partnership.

The correct answer is C.

A. Incorrect...
This answer is not correct, because the estate does not automatically become a partner; only if the child concurred would the estate become a partner.

B. Incorrect...
This choice is not correct because there cannot be a one-person partnership.

C. Correct!
However, the parent was the only other partner and the estate will have to be wound up expeditiously. Therefore, there will be no other entity left to be a partner. The surviving child could choose to continue to operate the farm in partnership with any siblings or other heirs of the parent's estate who might have gained an interest in the farm through the deceased parent's will, but that will require the consent of all parties and will be essentially a new and different partnership.

D. Incorrect...
Incorrect because a partnership agreement can indeed govern the continuation of the partnership and the RUPA encourages this.



Locke and Vorst were general partners in a kitchen equipment business.

On behalf of the partnership, Locke contracted to purchase 15 stoves from Gage. Unknown to Gage, Locke was not authorized by the partnership agreement to make such contracts. Vorst refused to allow the partnership to accept delivery of the stoves and Gage sought to enforce the contract.

Gage will:

A. Lose, because Locke's action was not authorized by the partnership agreement.

B. Lose, because Locke was not an agent of the partnership.

C. Win, because Locke had express authority to bind the partnership.

D. Win, because Locke had apparent authority to bind the partnership.

The correct answer is D.

A. Incorrect...
This answer is incorrect because even if action is not authorized by the partnership agreement, it still may bind the partnership if apparent authority exists.

B. Incorrect...
This answer is incorrect because Locke clearly was acting on behalf of the partnership and for its purposes; therefore, he was an agent of the partnership.

C. Incorrect...
This answer is incorrect because, although Gage will win, it will not be because of express authority. The facts indicate that Locke did not have express authority to enter into this type of contract.

D. Correct!
Locke, as a general partner, is an agent. He does not have actual authorization to buy the stoves, so he does not have express authority to buy them. However, he DOES have apparent authority.



Under the Uniform Partnership Act, which of the following statements is (are) correct regarding the effect of the assignment of an interest in a general partnership?

I. The assignee is personally responsible for the assigning partner's share of past and future partnership debts.

II. The assignee is entitled to the assigning partner's interest in partnership profits and surplus on dissolution of the partnership.

A. I only
B. II only
C. Both I and II
D. Neither I nor II

The correct answer is B.

A. Incorrect...
This is not the best answer because assignees of partnership interests do not, absent more, become liable for any obligations of the partnership or of the assigning partner.

B. Correct!
The assignee does not gain any other rights, such as the right to vote or the right to use partnership property for partnership purposes.

C. Incorrect...
This is wrong because only II is true.

D. Incorrect...
This is wrong because II is true.



Which of the following statements is correct with respect to the differences and similarities between a corporation and a limited partnership?

A. Stockholders may be entitled to vote on corporate matters, but limited partners are prohibited from voting on any partnership matters.

B. Stock of a corporation may be subject to the registration requirements of the federal securities laws, but limited partnership interests are automatically exempt from those requirements.

C. Directors owe fiduciary duties to the corporation and limited partners owe such duties to the partnership.

D. A corporation and a limited partnership may be created only under a state statute and each must file a copy of its organizational document with the proper governmental body.

The correct answer is D.

A. Incorrect...
Limited partners are prohibited from actively MANAGING a limited partnership, but they are not always prohibited from voting on other partnership matters. For example, limited partners may vote on the admission of a new partner and on removing a general partner. They are banned only from making decisions that directly affect the LPs course of business.

B. Incorrect...
The securities laws do not always exempt limited partnership interests. Since they are not corporations, LPs do not issue stock, but stock is not the only type of security covered by securities laws. DEBT SECURITIES, such as bonds and notes, are also regulated by, for example, the Securities Act of 1933. LPs can issue some kinds of DEBT securities and so are occasionally regulated.

C. Incorrect...
GENERAL partners and directors owe such duties, but LIMITED partners do not. In a limited partnership, there are two classes of partners -- general partners and limited partners. The general partners run the business; they alone are involved in management. They owe fiduciary duties towards the partnership when managing. Limited partners, on the other hand, CANNOT manage the partnership and do not owe the same duties.

D. Correct!
For all forms of doing business except for partnerships and sole proprietorships, special steps must be taken. More complex business organizations cannot exist without taking the proper steps as required by statute. One required step is always to file organizational documents, such as articles of incorporation, with a government entity such as the Secretary of State.



In a general partnership, the authorization of all partners is required for an individual partner to bind the partnership in a business transaction to:

A. Purchase inventory.
B. Hire employees.
C. Sell goodwill.
D. Sign advertising contracts.

The correct answer is C.

A. Incorrect...
This answer is incorrect because most partners in most businesses have the authority to purchase inventory for the business. This is a power implied from their position as partner.

B. Incorrect...
This answer is incorrect because most partners in most businesses have the authority to hire employees for the business. This is a power implied from their position as partner.

C. Correct!
In a partnership, any partner may conduct ordinary business activities without the approval of any other partner. It would be absurd to require a vote on every sale, order, or other common occurrence. However, the sale of goodwill is not an ordinary event. It is something unusual that is probably done only once. This type of extraordinary action does require the consent of the other partners.

D. Incorrect...
This answer is incorrect because most partners in most businesses have the authority to sign advertising contracts for the business. This is a power implied from their position as partner.

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