Digital Learning & Online Textbooks – Cengage



Chapter 20 Practice Exam

Matching Questions

Match the following terms with their definitions:

(5) B. Dissociation

(1) D. Dissolution

(3) E. Limited partnership

1. The first step in the process of terminating a partnership.

3. The general partner is liable.

5. A partner leaves the partnership.

True/False Questions

Circle true or false:

1. T F Sole proprietorships must file a tax return.

3. T F Creditors of a partnership must first seek recovery from partnership assets before going after the personal assets of a partner.

5. T F Venture capitalists often require companies they own to become LLCs before going public.

Multiple-Choice Questions

7. Which of the following statements is false:

(a) Partners are liable to the partnership for their own negligent conduct.

(b) Partners must turn over to the partnership any earnings from an activity that is related to the partnership’s business.

(c) If a partner is offered an opportunity that is related to the partnership business, he must first seek permission of the other partners before accepting it.

(d) A partner must turn over any profits from an activity that is a conflict of interest with the partnership.

(e) Partners are personally liable for intentional misconduct.

9. Joint and several liability means that:

(a) A creditor of the partnership must sue all the partners together.

(b) A creditor of the partnership must sue the partnership and all the partners together.

(c) A creditor of the partnership can recover the full amount owed from the partnership or from any of the partners.

(d) A creditor of the partnership can recover the full amount owed from the partnership or from eachpartner, even if this results in the creditor receiving more than his original debt.

(e) A creditor of the partnership can recover from the partners individually, but not from the partnership.

Short-Answer Questions

11. Under Delaware law, a corporation cannot appear in court without a lawyer, but a partnership can. Fox Hollow Ventures, Ltd., was a limited liability company. One of its employees, who was not a lawyer, appeared in court to represent the company. Does an LLC more closely resemble a partnership, which may represent itself in court, or a corporation, which requires representation by a lawyer?

Answer: Although an LLC is a partnership for federal income tax purposes, it is a separate legal entity (although not a taxable entity). The rights and interests of a member in an LLC are similar to those of shareholders in a corporation. Therefore, a lawyer in court must represent Fox Hollow Ventures. Poore v. Fox Hollow Enterprises, 1994 Del. Super. LEXIS 193 (Del. Super. Ct. 1994).

13. Mrs. Meadows opened a biscuit shop called The Biscuit Bakery. The business was not incorporated. Whenever she ordered supplies, she was careful to sign the contract in the name of the business, not personally: The Biscuit Bakery by Daisy Meadows. Unfortunately, she had no money to pay her flour bill. When the vendor threatened to sue her, Mrs. Meadows told him that he could only sue the business, because all the contracts were in the business’s name. Will Mrs. Meadows lose her dough?

Answer: Yes. The Biscuit Bakery was a sole proprietorship. No matter how Mrs. Meadows signed the contracts, she is still personally liable for the debts of the business.

15. ROLE REVERSAL: Write a multiple-choice question that focuses on the difference between an LLC and an S corporation.

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