The Law of Corporations and Other Business Organizations

Chapter Review Answers

1. Is a limited partnership treated as a separate
entity for all purposes?
No
If not, give an example of an instance in
which a limited partnership is treated as an
aggregate of its partners.
Limited partnerships are generally not
considered to be separate entities for income
tax purposes.
2. Why is the fiduciary duty between the general
partner and limited partners even
greater than the fiduciary duty between
partners in a general partnership?
Because general partners are in control
of the limited partnership and limited
partners are prohibited from participating
in the control of the business, the
general partners are often considered to
have a greater fiduciary duty to the limited
partners.
3. Suppose that Beth Henderson is a limited
partner of the ABC Limited Partnership, a
limited partnership formed for the purpose
of purchasing and developing real estate.
Beth wanted to be a limited partner because
she has considerable personal assets that
she wants to protect. Soon after the formation
of the limited partnership, Beth becomes
concerned about its management by
the general partners. She starts attending the
general partners’ meetings and participating
in all major decisions concerning the limited
partnership. However, the partnership
becomes insolvent anyway. Creditors are
left with thousands of dollars’ worth of unpaid
bills. The limited partnership and the
general partners have no substantial cash or
other assets. If the limited partnership is in
a state that follows the RULPA, might
creditors prevail in a lawsuit against Beth
Henderson to recover their losses?
Yes
Why or why not?
Even though it was Beth Henderson’s intent
to protect her personal assets by establishing
herself as a limited partner,
the degree of her participation in the
limited partnership may be considered
to be taking part in the control of the
limited partnership, and she may be
deemed to be a general partner.
4. Brian, Jeanne, and William have formed
OakRidge Limited Partnership, a limited
partnership for shopping center development
and management. William is the general
partner and Brian and Jeanne are limited
partners. The limited partnership is
about to enter into an agreement to purchase
a new shopping center; however, the
bank that is lending them the money wants
personal guarantees from each partner. If
the limited partnership is governed by the
laws of a state that follows the Revised
Uniform Limited Partnership Act, would
Brian and Jeanne be able to guarantee the
obligation of the OakRidge Limited Partnership
without risking their limited liability
status?
Yes, this is one of the activities set forth
in the safe harbor provisions of the Revised
Uniform Limited Partnership Act.
They would, of course, be personally liable
for the bank loan to the extent
agreed upon in their personal guarantees.
5. Suppose that Jake, Bryan, and Jill decide to
form a limited partnership for the purpose
of owning and operating a liquor store.
They are all concerned about their personal
liability, so they decide that they will all be
limited partners. Would this be possible?
No
Why or why not?
A limited partnership must have at least
one general partner. A partner may be
both a general partner and a limited
partner.
What if Jill agreed to be both a general
partner and a limited partner?
Yes
6. Why might a limited partnership want to
put only the minimum required information
in the limited partnership certificate
and go into more detail in the limited partnership
agreement or other documents?
The limited partnership certificate is a
document that is made a public record.
Information that the partners would
prefer to keep confidential should be put
into the limited partnership agreement
or other document that is not filed for
public record. Also, changes in significant
information contained in the limited
partnership certificate may require
an amendment to the limited partnership
certificate and an additional filing
with the secretary of state or other appropriate
state authority.
7. What is one advantage the limited partnership
has over the general partnership with
regard to raising capital for the business?
The limited partnership has the ability
to attract passive investors (limited
partners).
8. Who may initiate a derivative action?
In jurisdictions following the Revised
Uniform Limited Partnership Act, limited
partners may bring a derivative action
on behalf of the limited partnership.
Some jurisdictions may limit this right to
general partners.
9. Suppose that Katherine, Brianna, and Paige
have formed a limited partnership to operate
a video arcade. Katherine is the general
partner; she has contributed $2,000 and her
time to get the operation running. Brianna
and Paige, the limited partners, have each
contributed $3,000. After one year of operation,
the arcade has debts of $10,000, and
the three partners decide to discontinue
their business and the limited partnership.
Brianna and Paige want their investment
returned to them. Who should Katherine,
who is winding up the business, pay first—
Brianna and Paige, or the creditors?
If the state of the limited partnership follows
the RULPA, the creditors must be
paid before the partners.
How much will Brianna and Paige receive?
If there are sufficient assets to cover
the debt of the partnership, Brianna
and Paige would then receive any distributions
due to them under the partnership
agreement and a return of
their contributions ($3,000 each). If
there are no assets after the creditors
are paid, Brianna and Paige would lose
their investment and receive nothing.
How about Katherine?
Again, if there are sufficient assets to cover
the partnership debt, Katherine would
receive distributions due to her and a return
of her contribution ($2,000). However,
if there are insufficient assets to pay
the creditors, the creditors may look to
Katherine personally to pay the partnership’s
debt and obligations.
10. Suppose a limited partnership has just one
general partner, who suddenly dies. Will
the partnership dissolve?
Yes
Could a limited partnership continue if one
of three general partners suddenly dies?
Yes
If yes, under what circumstances?
If the certificate of limited partnership
allows continuation under the circumstances,
or if all partners agree to continue
the limited partnership within 90
days after the partner’s death.