Question 1

Attracted to the idea of being his own boss, Christian wants to start a new business. He is confident in his abilities, and knows his potential market is strong, so he is not particularly worried about the financial risks. All of these factors suggest that Christian may favor starting his business as a sole proprietorship.

Accepted Answer

Christian's confidence in his abilities and strong market suggest that he may prefer the flexibility and control of a sole proprietorship. Additionally, his lack of concern about financial risks may make the simplicity and cost-effectiveness of a sole proprietorship appealing.

Question 2

Although shares of master limited partnerships can be purchased on one of the national stock exchanges, these companies are taxed like partnerships.

Accepted Answer

Master limited partnerships are taxed differently than traditional corporations, as their income is only taxed once on the individual level, rather than twice (once on the corporate level and again on the individual level). This pass-through taxation treatment is similar to that of a partnership. Therefore, even though MLPs have stocks that can be purchased on national exchanges, they are taxed like partnerships.

Question 3

Unlike partnerships, if sole proprietorships find themselves in bankruptcy, they don't need to worry about a court requiring them to sell off personal assets to pay for the debts of the firm.

Accepted Answer

In a sole proprietorship, the individual owner is personally responsible for the debts of the firm. In case of bankruptcy, the court may require the sale of personal assets to pay off the debts.

Question 4

According to the Uniform Partnership Act, the three key elements of any general partnership are (1) shares of stock to represent ownership, (2) limited liability, and (3) ease of ownership transfer.

Accepted Answer

The Uniform Partnership Act does not require shares of stock or limited liability for general partnerships, and ownership transfer may not always be easy. Instead, the key elements of a general partnership are (1) an agreement between two or more persons to carry on a business for profit, (2) co-ownership and joint control of the business, and (3) shared profits and losses.

Question 5

One of the major disadvantages of a partnership is that profits must be divided equally.

Accepted Answer

Profit sharing in a partnership can be determined by the partnership agreement and does not necessarily have to be divided equally among partners.

Question 6

A general partner takes an active role in the management of the business.

Accepted Answer

A general partner is responsible for managing the operations of the partnership, making decisions, and assuming unlimited personal liability for the debts and obligations of the partnership.

Question 7

A limited partnership consists of one or more general partners and one or more limited partners.

Accepted Answer

A limited partnership requires at least one general partner who manages the business and has unlimited liability, and one or more limited partners who contribute capital but have limited liability and no management authority.

Question 8

In order to protect all parties and minimize misunderstandings among partners, all terms of the partnership should be spelled out in writing.

Accepted Answer

Having a written agreement that clearly outlines the terms of the partnership is important to avoid misunderstandings and protect all parties involved in the partnership. It is important to have a clear understanding of roles, responsibilities, expectations, and how profits and losses will be shared. This written agreement should be drafted by a legal professional and signed by all partners involved.

Question 9

Limited partnerships are just like general partnerships, except that they are partners for a limited time period.

Accepted Answer

Limited partnerships are different from general partnerships in several ways. The most notable difference is that in a limited partnership, there are two types of partners: general partners and limited partners. General partners are responsible for managing the business, whereas limited partners are only liable for the amount of capital they contribute and have limited control over the business operations. Additionally, limited partnerships are formed through a formal filing with the state and have a specific duration (which can be extended), whereas general partnerships can be formed informally and can exist indefinitely.

Question 10

According to the Uniform Partnership Act, the three key elements of any general partnership are (1) common ownership, (2) shared profits and losses, and (3) the right to participate in managing the operations of the business.

Accepted Answer

The Uniform Partnership Act indeed lists these three elements as the key characteristics of a general partnership.

Question 11

In a general partnership, all partners share in management of the business and in the liability for the firm's debts.

Accepted Answer

In a general partnership, all partners have equal management authority and share in the profits and losses of the business, as well as being jointly and severally liable for the business's debts and obligations.

Question 12

A limited partner is an owner who assumes no management responsibility and has no liability for losses beyond the amount invested.

Accepted Answer

This is the definition of a limited partner. They provide capital to the partnership but have no management authority and are not personally liable for the partnership's debts beyond their investment.

Question 13

A recent study showed that partnerships are more likely to fail than sole proprietorships.

Accepted Answer

The answer of A recent study showed that partnerships are...

Question 14

Rhonda is convinced she has the best idea for a new business. Unfortunately, her business would require a fairly high initial investment and Rhonda has poor credit and very little personal wealth. She would be unlikely to find success if she organized her business as a sole proprietorship.

Accepted Answer

As a sole proprietorship, Rhonda would be solely responsible for funding her business and any debts it incurs. With poor credit and little personal wealth, she would likely struggle to secure the necessary initial investment and could face financial ruin if the business fails. Incorporating the business or seeking investors may be more feasible options for Rhonda.

Question 15

In a general partnership, all partners are entitled to an equal share of the firm's profits.

Accepted Answer

The answer of In a general partnership, all partners are...

Question 16

A major objective of limited liability partnerships (LLPs) is to limit each partner's personal liability to the consequences of their own acts and those of people under their supervision.

Accepted Answer

This is one of the key features of LLPs. Each partner is not personally liable for the actions of other partners, unless they were directly involved in those actions themselves.

Question 17

The Uniform Partnership Act is law in most states, except California, Oregon, and Colorado.

Accepted Answer

The Uniform Partnership Act is law in all 50 states. However, some states have adopted the Revised Uniform Partnership Act or their own partnership laws based on the Uniform Partnership Act.

Question 18

All partners in a general partnership have limited liability for the debts of their firm.

Accepted Answer

In a general partnership, each partner has unlimited personal liability for the debts and obligations of the partnership. This means that if the partnership cannot pay its debts, creditors can go after the personal assets of each partner to satisfy the debts.

Question 19

Therese is a talented designer who wants to start her own women's swimwear and beach towel line. But first, she is trying to decide which form of business ownership is right for her. As a young mom who hopes to send her children to college some day, she does not want to jeopardize her savings in any way. In order to overcome these risks, Therese should start her business as a sole proprietorship.

Accepted Answer

Starting a business as a sole proprietorship would expose Therese's personal assets to any liabilities that may arise from her business. Instead, she should consider forming a limited liability company (LLC) to protect her personal assets.

Question 20

A general partner has unlimited liability for the debts of the partnership only if he or she personally approved the decisions that resulted in those debts.

Accepted Answer

The answer of A general partner has unlimited liability for...

Quiz 5: How to Form a Business