Test Prep Test Prep Certifications BUSINESS-ENVIRONMENT-AND-CONCEPTS Questions & Answers

• Question 481:

  Which of the following statements is correct with respect to a limited partnership?

  A. A limited partner may not be an unsecured creditor of the limited partnership.

  B. A general partner may not also be a limited partner at the same time.

  C. A general partner may be a secured creditor of the limited partnership.

  D. A limited partnership can be formed with limited liability for all partners.

  Correct Answer: C

  Choice "c" is correct. In a limited partnership, a general partner may be a secured creditor of the limited

  partnership.

  Choice "a" is incorrect. In a limited partnership, a limited partner may be an unsecured creditor of the

  limited partnership.

  Choice "b" is incorrect. In a limited partnership, a general partner may also be a limited partner at the same

  time.

  Choice "d" is incorrect. In a limited partnership, only the limited partners will have limited liability. A limited

  partnership must have at least one general partner and general partners have unlimited liability.

  (The word "all" makes this option wrong.)

• Question 482:

  Lisa is a limited partner in a limited partnership. Jen, one of the other limited partners, is seeking to sell her interest in the partnership to Karen and allow Karen to become a new limited partner. Which of the following statements is true?

  A. Lisa may engage in the management of the limited partnership without losing her limited liability.

  B. Jen may transfer her interest and make Karen a new limited partner without the approval of the other partners.

  C. Jen may withdraw from the limited partnership without giving notice to the partnership.

  D. Lisa has a right to vote on the transferring of interest to and admission of Karen as a limited partner.

  Correct Answer: D

  Choice "d" is correct. Limited partners have the right to vote on the transfer of interest and admission of a new partner. Admission of a new partner requires unanimous consent. Choice "a" is incorrect. A limited partner who acts as a general partner loses her limited liability status to those she acted as a general partner towards. Choice "b" is incorrect. Partners can freely transfer their interests in profits and losses to third parties, but the third party cannot become a limited partner without the unanimous consent of the other partners. Choice "c" is incorrect. Limited partners must give 6 months notice of withdrawal in absence of an agreement to the contrary.

• Question 483:

  Aarons Group, Limited Partnership, was formed by three brothers, Aaron, Barry, and Sam. Aaron is the general partner and devotes more than 60 hours per week to the business. Barry and Sam are limited partners who work for different companies having no relationship to the limited partnership. The partners' capital contributions are as follows: Aaron invested 20%. Barry and Sam invested 40% each. During the formation of the limited partnership, the brothers signed an agreement that addresses how the brothers will split profits and losses. At year-end, the limited partnership enjoyed large profits due to high demand for the business' product line. The profits will be divided:

  A. In proportion to each partner's capital contribution.

  B. According to the agreement.

  C. Equally.

  D. By determining by the amount of time and labor each partner devoted to the operation of the partnership.

  Correct Answer: B

  Choice "b" is correct.

  Rule: Partners in a limited partnership can agree as to how they will split profits and losses, with losses

  shared up to the amount of the limited partners' capital. Profits and losses are shared on the basis of

  percentages of capital contributions only in the absence of an agreement otherwise.

  Choices "a", "c", and "d" are incorrect, per the above rule.

• Question 484:

  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.

  Correct Answer: D

  Choice "d" is correct. Both a limited partnership and a corporation:

  1.

  Can only be created by statute, and

  2.

  Each must file a copy of its certificate with the proper state agency.

  Choice "a" is incorrect. There are instances in which limited partners do vote on certain partnership matters

  (e.g., approve new general or limited partners).

  Choice "b" is incorrect. Limited partnership interests are not automatically exempt from the federal

  securities laws.

  Choice "c" is incorrect. Limited partners do not owe a fiduciary duty to the limited partnership.

• Question 485:

  Doug was the sole general partner in Heavy Foot, Limited Partnership. While driving to work one morning, Doug died in a car accident. The limited partnership:

  A. Continues to exist as it was before Doug's death.

  B. Dissolves by operation of law as a result of Doug's death.

  C. Dissolves only by attaining a judicial decree.

  D. Converts to a general partnership and all former limited partners become general partners.

  Correct Answer: B

  Choice "b" is correct.

  Rule: The death of a general partner will by operation of law, dissolve the limited partnership. Because the

  dissolution is by operation of law, there is no requirement to attain a judicial decree. Remaining limited

  partners do not automatically become general partners as a result of the death of the general partner.

  Choices "a", "c", and "d" are incorrect, per the above rule.

• Question 486:

  Juan is a limited partner in Pet Food and Fun, Limited Partnership. Juan visited Chow, Inc., a local supplier

  of dog food claiming to be a "partner" in the partnership and negotiated a distribution contract between the

  supplier and limited partnership on behalf of the partnership.

  As a result of these actions, Juan:

  A. Has limited liability as a limited partner in reference to all creditors.

  B. Has limited liability as a limited partner to all creditors except Chow, Inc.

  C. Has full personal liability to all creditors.

  D. None of the above.

  Correct Answer: B

  Choice "b" is correct. Rule: A limited partner will be considered a general partner with full personal liability only to those that the limited partner transacts with as if he were a general partner. Limited partners have no right to participate in management, such as negotiating contracts on behalf of the limited partnership. The limited partner will retain his status and limited liability to all others that the limited partner has not transacted with on behalf of the partnership. Choices "a", "c", and "d" are incorrect, per the above rule.

• Question 487:

  A limited partnership must have:

  A. One general partner and two limited partners.

  B. All must be general partners and one limited partner.

  C. One general partner and one limited partner.

  D. All limited partners.

  Correct Answer: C

  Choice "c" is correct.

  Rule: A limited partnership must have at least one general partner and one limited partner.

  Choices "a", "b", and "d" are incorrect, per the above rule. Be careful of answers that include the word "all."

• Question 488:

  Green Trees, LP is a limited partnership. Dave is a limited partner. Seeds Today, InC. is a creditor of the limited partnership. Upon dissolution of the partnership, the assets of Green Trees, LP will be distributed to pay:

  A. Seeds Today, Inc., first.

  B. Dave first.

  C. Seeds Today, Inc. and Dave.

  D. The general partners first.

  Correct Answer: A

  Choice "a" is correct.

  Rule: Upon dissolution, the assets of a limited partnership are first used to pay off the outside creditors.

  Limited partners such as Dave are next in line.

  Choices "b", "c", and "d" are incorrect, per the above rule.

• Question 489:

  Which of the following partners of a limited liability partnership (LLP) may avoid personal liability when a partner commits a negligent act?

  A. All the partners.

  B. The supervisor of the negligent partner.

  C. All the partners other than the negligent partner.

  D. All the partners other than the supervisor of, and, the negligent partner.

  Correct Answer: D

  Choice "d" is correct. LLP partners are liable only for their own negligence and the negligence of anyone

  who commits a wrongful act under the partner's direct control.

  Choices "a", "b", and "c" are incorrect, per the above.

• Question 490:

  Jones, Smith, and Bay wanted to form a company called JSB Co. but were unsure about which type of entity would be most beneficial based on their concerns. They all desired the opportunity to make taxfree contributions and distributions where appropriate. They wanted earnings to accumulate tax-free. They did not want to be subject to personal holding tax and did not want double taxation of income. Bay was going to be the only individual giving management advice to the company and wanted to be a member of JSB through his current company, Channel, InC. Which of the following would be the most appropriate business structure to meet all of their concerns?

  A. Proprietorship.

  B. S corporation.

  C. C corporation.

  D. Limited liability partnership.

  Correct Answer: D

  Choice "d" is correct. An LLP does not pay taxes on its earnings. Instead, the profits and losses flow through to the partners as in a general partnership. The LLP files an informational tax return like that of a general partnership. The partners may agree to have the entity managed by one or more of the partners. A partner may be another entity. Choice "a" is incorrect. A proprietorship by definition has only one owner, not three owners. Choice "b" is incorrect. While an S corporation allows for the same treatment of its earnings and distributions as in the facts, it is prohibited from having another company as an owner. Choice "c" is incorrect. A C corporation pays its own taxes on its earnings, and any distributions to its shareholders are again taxed at the shareholder level (known as "double taxation").