Deck 16: Law of Partnership

Question 1

Harry, Clyde, and Pete carried on business in partnership as hardware merchants. Clyde, who did most of the purchasing of stock for the partnership, would occasionally purchase (using his own money) an extra quantity of some items that could readily be sold to consumers. He would use the truck owned by the business on the weekends to travel to his cottage where he would sell the items to cottage owners in the area of his own cottage. Harry and Pete were unaware of Clyde's actions, as Clyde had not revealed his weekend business activity to either Harry or Pete. Because Clyde was not selling the goods in the area where Harry, Clyde, and Pete carry on business, he is entitled to keep his profits.

Answer 1

False

Question 2

A partner

A) may freely transfer his or her partnership interest to another.
B) holds shares in the real and personal property of the partnership.
C) is an agent of every other partner.
D) must have capacity at law.
E) All of the responses are correct.

Answer 2

E

Question 3

Jim and Rob are partners in a consulting business. Jim's initial contribution was $30,000, Rob's was $20,000. Emily is a limited partner who contributed $10,000. The partnership also borrows $60,000 from Vancouver Credit Union. The partners agree that profits and losses will be shared in proportion to their capital contributions. The business fails. Jim pays the entire $60,000 debt to the Vancouver Credit Union. How much can he collect from Emily?

A) $60,000
B) $30,000
C) $20,000
D) $10,000
E) Nothing

Answer 3

E

Question 4

Greg, Mike, and Charlie carry on business in partnership as "tree surgeons." Serena contacted Greg, and arranged to have a large tree removed from her front yard on a Saturday morning. Greg arrived, and cut the tree in such a way that it fell on Serena's house, causing considerable damage. Serena may bring an action against Greg, Mike, and Charlie for the negligence of Greg.

Question 5

Greg, Mike, and Charlie carry on business in partnership as "tree surgeons." Serena contacted Greg, and arranged to have a large tree removed from her front yard on a Saturday morning. Greg arrived, and cut the tree in such a way that it fell on Serena's house, causing considerable damage. Only Greg is liable, because he cut the tree on a Saturday morning.

Question 6

When Peter gave notice to Paul and Mary of dissolution of their entertainment partnership business, the capital accounts were as follows:
Peter Paul Mary
$30,000 $50,000 $20,000
The partnership assets were liquidated to $30,000. Outstanding liabilities to third parties totaled $39,000. Distributed to Peter, Paul and Mary each will respectively receive

A) $20,000, $30,000, $50,000.
B) $27,000, $47,000, $17,000.
C) $27,000, $45,000, $18,000.
D) $30,000, $50,000, $20,000.
E) $28,500, $41,250, $16,000.

Question 7

In the absence of any express or implied agreement to the contrary,

A) a new partner may be admitted to a partnership by the decision of a majority of the partners.
B) no partner is entitled to payment for acting in the partnership business.
C) all partners may share equally in partnership capital and profits and must contribute equally towards all losses.
D) a new partner may be admitted to a partnership by the decision of a majority of the partners and no partner is entitled to payment for acting in the partnership business.
E) all partners may share equally in partnership capital and profits and must contribute equally towards all losses and no partner is entitled to payment for acting in the partnership business.

Question 8

Greg, Mike, and Charlie carry on business in partnership as "tree surgeons." Serena contacted Greg, and arranged to have a large tree removed from her front yard on a Saturday morning. Greg arrived, and cut the tree in such a way that it fell on Serena's house, causing considerable damage. Only Greg would be liable, because he did not inform Mike and Charlie of the agreement he made with Serena.

Question 9

Harry, Clyde, and Pete carried on business in partnership as hardware merchants. Clyde, who did most of the purchasing of stock for the partnership, would occasionally purchase (using his own money) an extra quantity of some items that could readily be sold to consumers. He would use the truck owned by the business on the weekends to travel to his cottage where he would sell the items to cottage owners in the area of his own cottage. Harry and Pete were unaware of Clyde's actions, as Clyde had not revealed his weekend business activity to either Harry or Pete. Harry and Pete are entitled to claim their share of the profits earned by Clyde from his weekend selling activity.

Question 10

Limited partnerships are generally subject to specific legislation, providing that

A) limited partners have limited authority to bind the partnership.
B) the inclusion of a limited partner in the firm name automatically makes them a general partner.
C) at least one partner has unlimited joint and several liability for partnership debts.
D) limited partners' liability is capped by the amount of capital contributed but profits may be shared in any proportion as long as a limited partner does not assist in running the business.
E) All of the responses are true.

Question 11

Sunny is a sole proprietor operating a flower shop. She called the shop Sunny Daze. Does she have to register the name of the business?

A) No. Sole proprietorships do not have to be registered.
B) No. Sole proprietorships do not have to be registered unless they are being carried on under a name other than the proprietor's.
C) Yes. Sole proprietorships have to register the name in all circumstances to protect all of those doing business with it.
D) Yes. Sole proprietorships must be registered when dealing with consumers.

Question 12

The partnership form of business organization should be entered into with caution because

A) the firm will be bound to perform any contract entered into by a partner with third parties.
B) a third party may claim damages against the partnership for injury incurred as the result of any tort committed by a partner.
C) partners may leave the firm to avoid debts or claims against the partnership.
D) the admission of a new partner to the firm does not automatically render the new partner liable for the existing debts of the partnership.
E) All of the responses are correct.

Question 13

Zack was a partner in a management consulting firm that specialized in assisting small businesses in the area of financial planning. The firm did not perform income tax savings. However, since Zack had personal expertise in tax accounting, he frequently assisted friends, as well as some firm clients, in preparing their income tax returns. Usually he borrowed the firm's adding machine and other office supplied to perform this work from his home unbeknownst to his partners. Zack may be required to

A) retire from the partnership for breach of warranty of authority.
B) account to the other partners for any money received from his income tax service.
C) assign his share in the partnership to another to take his place in the partnership.
D) All of the responses are possible
E) None of the responses are possible.

Question 14

Jim, Rob and Emily are partners in a limited liability partnership where they practise law. Jim's initial contribution was $30,000, Rob's was $20,000 and Emily's was $10,000. The partners agree that profits and losses will be shared in proportion to their capital contributions. Jim is sued $60,000 for negligence. How much can he collect from Rob?

A) $60,000
B) $30,000
C) $20,000
D) $10,000
E) Nothing

Question 15

Greg, Mike, and Charlie carry on business in partnership as "tree surgeons." Serena contacted Greg, and arranged to have a large tree removed from her front yard on a Saturday morning. Greg arrived, and cut the tree in such a way that it fell on Serena's house, causing considerable damage. If the partnership is held liable for Serena's loss, Mike and Charlie would be entitled to recover the loss from Greg, because Greg was careless in doing the work.

Question 16

Jim, Rob and Emily are partners in a consulting business. Jim's initial contribution was $30,000, Rob's was $20,000 and Emily's was $10,000. The partnership also borrows $60,000 from Vancouver Credit Union. The partners agree that profits and losses will be shared in proportion to their capital contributions. The business fails. What is Jim's liability to Vancouver Credit Union?

A) $60,000
B) $30,000
C) $20,000
D) $10,000
E) Nothing

Question 17

In a limited partnership, which of the following are true?

A) There is no practical need for a general partner.
B) Only a general partner may actively transact business.
C) A limited partner cannot become a general partner without consent of the all other partners.
D) Limited partners may draw against capital, prior to dissolution, only up to the amount of their own contribution to capital.
E) A limited partner who agrees not to actively transact business on behalf of the partnership may avoid public disclosure of his or her contribution to capital.

Question 18

Sandra, Allison, and Colette joined in partnership to provide commercial marketing research services. Allison became unsatisfied with the relationship and unilaterally assigned her interest to Katrina. Which of the following are true?

A) Katrina has received nothing in return for what she might have paid Allison.
B) The partnership is terminated.
C) Katrina has acquired a right to a share of the assets, but not to participate.
D) Katrina has acquired the right to participate but not a share of the assets.
E) Katrina is a full partner with Sandra and Colette, without limitation.

Question 19

Jim, Rob and Emily are partners in a consulting business. Jim's initial contribution was $30,000, Rob's was $20,000 and Emily's was $10,000. The partnership also borrows $60,000 from Vancouver Credit Union. The partners agree that profits and losses will be shared in proportion to their capital contributions. The business fails. Jim pays the entire $60,000 debt to the Vancouver Credit Union. How much can he collect from Rob?

A) $60,000
B) $30,000
C) $20,000
D) $10,000
E) Nothing

Question 20

Unless there is an agreement to the contrary in the partnership agreement, which of the following events will automatically bring a partnership to an end?

A) The personal bankruptcy of a partner.
B) The death of a partner.
C) The expiry of the term of a fixed-term contract.
D) The willful and persistent breach of the partnership agreement by a partner.
E) The personal bankruptcy of a partner, the death of a partner or the expiry of the term of a fixed-term contract.

Question 21

The partners of Green Grow Landscaping no longer feel that James is contributing to the firm's business. Green Grow has no partnership agreement. Four out of six of the partners may vote to successfully dismiss James from the partnership.

Question 22

Angie, Chloe, and Michele carry on business in partnership as landscape gardeners. Angie purchased a set of patio furniture on credit for her personal use from a firm where the partnership purchased most of its equipment. Angie failed to pay for the goods, and the equipment supplier charged the purchase of the furniture to the partnership, as the goods had been delivered to the partnership's place of business. The sharing of business profits is insufficient to indicate the existence of a partnership agreement.

Question 23

Harry, Clyde, and Pete carried on business in partnership as hardware merchants. Clyde, who did most of the purchasing of stock for the partnership, would occasionally purchase (using his own money) an extra quantity of some items that could readily be sold to consumers. He would use the truck owned by the business on the weekends to travel to his cottage where he would sell the items to cottage owners in the area of his own cottage. Harry and Pete were unaware of Clyde's actions, as Clyde had not revealed his weekend business activity to either Harry or Pete. The partnership is automatically dissolved because of Clyde's actions.

Question 24

Angie, Chloe, and Michele carry on business in partnership as landscape gardeners. Angie purchased a set of patio furniture on credit for her personal use from a firm where the partnership purchased most of its equipment. Angie failed to pay for the goods, and the equipment supplier charged the purchase of the furniture to the partnership, as the goods had been delivered to the partnership's place of business. If the goods were not purchased in the ordinary course of partnership business, and purchased in Angie's name only, the partnership would be liable, because the partnership is liable for the personal debts of the partner.

Question 25

Angie, Chloe, and Michele carry on business in partnership as landscape gardeners. Angie purchased a set of patio furniture on credit for her personal use from a firm where the partnership purchased most of its equipment. Angie failed to pay for the goods, and the equipment supplier charged the purchase of the furniture to the partnership, as the goods had been delivered to the partnership's place of business. The partnership is liable, because Angie, as a partner, could bind the firm in contracts made in the ordinary course of partnership business.

Question 26

The provisions of the Partnership Act supersede the terms of a partnership agreement with respect to the rights and obligations of the partners to one another.

Question 27

John and Pat purchased a joint interest in a two-hectare campground with a variety store and mini-golf course, and retained the existing manager to handle day-to-day operations. From time to time they made improvements to the site and each year they divided the profits (or losses) from the campground equally. John and Pat are partners.

Question 28

Angie, Chloe, and Michele carry on business in partnership as landscape gardeners. Angie purchased a set of patio furniture on credit for her personal use from a firm where the partnership purchased most of its equipment. Angie failed to pay for the goods, and the equipment supplier charged the purchase of the furniture to the partnership, as the goods had been delivered to the partnership's place of business. The partnership is liable for the furniture, because the furniture was delivered to the partnership's place of business.

Question 29

Angie, Chloe, and Michele carry on business in partnership as landscape gardeners. Angie purchased a set of patio furniture on credit for her personal use from a firm where the partnership purchased most of its equipment. Angie failed to pay for the goods, and the equipment supplier charged the purchase of the furniture to the partnership, as the goods had been delivered to the partnership's place of business. The partnership is not liable, as the goods were not purchased in the ordinary course of partnership business.

Question 30

The partners of Green Grow Landscaping no longer feel that James is contributing to the firm's business. Green Grow has no partnership agreement. James may not transfer his share in the partnership to another person.

Question 31

Harry, Clyde, and Pete carried on business in partnership as hardware merchants. Clyde, who did most of the purchasing of stock for the partnership, would occasionally purchase (using his own money) an extra quantity of some items that could readily be sold to consumers. He would use the truck owned by the business on the weekends to travel to his cottage where he would sell the items to cottage owners in the area of his own cottage. Harry and Pete were unaware of Clyde's actions, as Clyde had not revealed his weekend business activity to either Harry or Pete. Clyde's actions were in breach of the partnership agreement, since the agreement is a contract of utmost good faith.

Question 32

Any partner may terminate a partnership agreement that is for a specified period of time upon giving notice of dissolution to the remaining partners.

Question 33

The partners of a small accounting firm delegate responsibilities among themselves for various duties. Davis is responsible for professional development. After reserving a banquet room and food for a seminar at which a leading tax accountant will speak, Davis learns on the eve of the seminar that the guest cannot attend. If Davis arranges a Christmas party at a local restaurant for partners and their spouses, the restaurant can demand payment from Davis if the firm fails to pay the bill.

Question 34

The partners of Green Grow Landscaping no longer feel that James is contributing to the firm's business. Green Grow has no partnership agreement. The partners must unanimously vote to dismiss James from the partnership.

Question 35

A partner who acts beyond his actual authority in dealings with third parties will be liable to the other partners under the notion of "breach of warranty of authority."

Question 36

Harry, Clyde, and Pete carried on business in partnership as hardware merchants. Clyde, who did most of the purchasing of stock for the partnership, would occasionally purchase (using his own money) an extra quantity of some items that could readily be sold to consumers. He would use the truck owned by the business on the weekends to travel to his cottage where he would sell the items to cottage owners in the area of his own cottage. Harry and Pete were unaware of Clyde's actions, as Clyde had not revealed his weekend business activity to either Harry or Pete. Clyde's only liability to Harry and Pete is for expenses for his use of the truck.

Question 37

An ex-partner can never be liable for partnership debts incurred after he leaves the partnership.

Question 38

The partners of a small accounting firm delegate responsibilities among themselves for various duties. Davis is responsible for professional development. After reserving a banquet room and food for a seminar at which a leading tax accountant will speak, Davis learns on the eve of the seminar that the guest cannot attend. The firm is liable for the banquet cancellation charge.

Question 39

Harry, Clyde, and Pete carried on business in partnership as hardware merchants. Clyde, who did most of the purchasing of stock for the partnership, would occasionally purchase (using his own money) an extra quantity of some items that could readily be sold to consumers. He would use the truck owned by the business on the weekends to travel to his cottage where he would sell the items to cottage owners in the area of his own cottage. Harry and Pete were unaware of Clyde's actions, as Clyde had not revealed his weekend business activity to either Harry or Pete. Clyde must pay over to the partnership the profit earned by his weekend selling, because he used partnership assets to earn the profits.

Question 40

John and Pat purchased a joint interest in a two-hectare campground with a variety store and mini-golf course and retained the existing manager to handle day-to-day operations. From time to time they made improvements to the site and each year they divided the profits (or losses) from the campground equally. If Pat takes over operational management and John assumes the administrative tasks associated with the campground, a partnership exists in respect of the business.

Question 41

Chrissie and Mark have formed a partnership under the firm name of "Fresh Face," to make and market their own line of natural cosmetics. Each contributed $15,000 in capital, but they needed a further $30,000 to start up. They persuaded Mark's mother and Chrissie's father to contribute $15,000 each as limited partners. The limited partnership was properly registered. Mark's mother, a lawyer, occasionally gave them some free legal advice. Chrissie's father, a plastics manufacturer, advised them on aspects of managing a business, and at one point, found them a better and cheaper packaging supplier through his own industry contacts.
Maggie, a famous model, tried their products, and became permanently scarred by a piece of glass in one of their pots of face cream. Maggie sued for $1 million for damages for breach of warranty of fitness for the purpose intended. The business has assets of $120,000. Chrissie and Mark each have personal assets of $20,000. Mark's mother has personal assets of $50,000, and Chrissie's father is a millionaire twice over. The capital accounts of the partners are still $15,000 each. There are no other creditors.
a. If you were representing Maggie, what action would you take, and against what parties? Assess the success of your action as against each party you name.
b. Regardless of your answer in a), if your argument was successful against Chrissie, Mark, and Chrissie's father, but not against Mark's mother, who would pay (and what amount) Maggie's million?
c. Would any of the foregoing be different if the limited partnership had not been registered?

Question 42

When one joins an existing partnership, care must be taken to examine the records of the partnership as any new partner automatically becomes jointly and severally liable for the existing partnership debts along with the existing partners.

Question 43

SpeedPlus Delivery Service, an unregistered partnership in Vancouver, has been sued by the injured party in a motor vehicle accident that occurred with one of SpeedPlus's delivery trucks. SpeedPlus believes it has a good defence in contributory negligence. SpeedPlus may immediately file a Statement of Defence in these proceedings.

Question 44

To the extent that there is no express agreement to the contrary, provincial partnerships legislation will "fill in" gaps in defining the partners' relationship, and generally speaking, any agreement of the partners regarding their relationship will supersede the provisions of the legislation.

Question 45

The identity of a limited partner is rarely disclosed to third parties engaged in general business relations with the partnership.

Question 46

Limited liability partnerships (LLP) are suitable forms of organization for professionals such as accountants and lawyers.

Question 47

A partner's share in the partnership is unascertainable until the firm's assets are liquidated.

Question 48

In an accounting limited liability partnership (LLP), the partnership is liable for the negligence of a partner in the performance of his or her professional duties.

Question 49

Limited partners may actively participate in the control of the partnership without jeopardizing their limited liability status.

Question 50

No general partner of a registered partnership may be a minor.

Question 51

Set out the terms and provisions that should be contained in a written partnership agreement together with a brief rationale for each.

Question 52

Describe the purpose and effect of partnership registration.

Question 53

Discuss the way(s) in which a partnership may be dissolved and the various issues that arise upon dissolution, including the process of liquidation.

Question 54

What matters, in the absence of an express agreement to the contrary, will partnerships legislation impose regarding partners interests with respect to each other?

Question 55

Nancy, aged 17 years, and Jean, 19, planned to earn money in the summer by sewing children's clothing and placing it on consignment at a local clothing store. Each of the girls owned their own sewing machine and worked from their own home. The girls decided to pool their funds for the purchase of necessary supplies. The proceeds of any sales would be deposited in the pool. Nancy, with Jean's consent, placed an order with a fabric store for 100 metres of fabric, which she planned to use for a line of dresses she had designed. After the fabric was delivered and she had completed several dresses, Nancy informed Jean that she was going to spend the remainder of the summer travelling with her family. She then gave the remaining fabric to Jean and asked for her share of the profits to date. The fabric had not yet been paid for. Discuss the nature of this relationship, and the duties and liabilities of the parties, if any.

Question 56

A partnership is a relationship of mutual trust that may or may not be a contractual relationship.

Question 57

The liability of a limited partner is restricted to his or her contribution to capital, and the limited partner may manage this exposure by either increasing or decreasing that contribution during the life of the partnership.

Question 58

A limited partner who allows his or her name to appear on the partnership's letterhead will likely be considered to be a fully liable general partner.

Question 59

SpeedPlus Delivery Service, an unregistered partnership in Toronto, has been sued by the injured party in a motor vehicle accident that occurred with one of SpeedPlus's delivery trucks. SpeedPlus believes it has a good defence in contributory negligence.

Question 60

Explain the circumstances where it would be preferable to use partnership as a form of business organization. What are the risks?

Question 61

Sumir and Pete each operated businesses selling business communication equipment. Sumir's business was incorporated and Pete worked as a sole proprietor. Each promoted different lines of business equipment. The two friends were discussing business one evening when it occurred to them that they could pool their resources and work together for greater combined profit.
Pete decided to combine his sole proprietorship with Sumir's corporation in return for an equal share of Sumir's business shares. They then combined their inventories. Sumir assumed Pete's accounts receivable and payable and line of credit. Pete obtained signing authority from the bank for cheques drawn on Sumir's business accounts. Pete also brought his client base and line of products with him to the venture.
Some time after they had combined their businesses, Pete and Sumir began having disagreements about certain business matters. In particular, they could not agree on a uniform marketing plan or customer territory. Most notably, they could not agree on an appropriate division of commission based on who provided what client base and, making matters worse, Pete had little cash to inject into the business. These difficulties occurred before Pete and Sumir's solicitor had been able to transfer to Pete his equal share of stock.
The business was dissolved, and Pete sought an equal share of profits and capital. Discuss the legal issues which will be raised by the parties. What would be the likely outcome should litigation ensue?