The Law of Corporations and Other Business Organizations

Chapter Review Answers

1. What five elements are necessary to form a
partnership?
1. The partnership must have two or more partners.
2. The partners must actively carry on the partnership business together.
3. The partners must co-own the partnership business or property.
4. The partnership must be formed to carry on a “business” (defined as “. . . every trade, occupation, or profession”).
5. The partnership must be formed with the intent of making a profit.

2. In what ways are partnerships similar to sole proprietorships?
Some of the ways in which partnerships
are similar to sole proprietorships include
the fact that both partners and sole
proprietors have unlimited personal liability,
partnerships are taxed in much
the same manner as sole proprietorships,
there are few organizational costs
and formalities associated with both sole
proprietorships and partnerships, and
partnerships are sometimes considered
to be an extension of the individual
partners, not separate entities.
In what ways do they differ from sole proprietorships?

Unlike a sole proprietorship, it takes at
least two individuals or entities to form a
partnership. Also unlike sole proprietorships,
partnerships are considered separate
entities under certain circumstances.

3. Suppose that John, Megan, and Alex form
a partnership to operate a restaurant in a
state that follows the UPA 1997. John decides
to buy hamburger buns from the
Fresh Bread Bakery. He enters into a contract
with the owner of the Fresh Bread
Bakery, on behalf of the partnership, for
the delivery of 500 hamburger buns each
week, for the price of $70 per week. If Megan
and Alex disagree with this decision
because they prefer another baker, is the
partnership still liable for this contract?

Yes, John has apparent authority to
bind the other partners in a relationship
with a third party. The representatives
of the Fresh Bread Bakery would be reasonable
in assuming that John had authority
to enter into the contract to bind
the partnership.
Must the Fresh Bread Bakery be paid out
of the partnership funds?

Yes

4. Suppose again that John, Megan, and Alex
form a partnership, and John has contributed
50 percent of the capital, Megan has
contributed 30 percent of the capital, and
Alex has contributed 20 percent of the capital.
Who has the right to manage the partnership
under the UPA 1997, assuming the
partnership agreement has no contrary provisions?

Assuming that there are no partnership
agreement provisions to the contrary,
John, Megan, and Alex all have an equal
right to manage the partnership business.

How will decisions be made in the event of
a disagreement?

Assuming that there are not partnership
agreement provisions to the contrary, by
the vote of a majority of the partners

5. In a state that follows the UPA 1914, how
is partnership property owned? How is that
different from property owned by a partnership
in a state that follows the UPA 1997?

In states that follow the provisions of the
UPA 1914 regarding property ownership,
the partnership property is held in
a tenancy in partnership, with each
partner considered a co-owner of specific
partnership property. Each partner
has an equal right to possess the property
for partnership purposes, but no right
to possess for any other purposes without
consent of the other partners. In
states that follow the UPA 1997 with regard
to partnership property, the property
is owned by the partnership itself.

6. Kara, Tim, and Anna have formed a partnership
to purchase and renovate old
homes. Kara and Tim have contributed the
bulk of the capital for the partnership, and
Anna’s main contribution has been her services.
All partners agree that either Kara or
Tim should have the authority to sign documents
transferring real estate on behalf of
the partnership and that Anna should not
have that authority. If the partnership is
formed in a state that follows the UPA
1997, what steps must they take to give notice
to those dealing with their partnership
of their agreement with regard to the authority
to transfer real estate?

In addition to entering into a partnership
agreement stating their intentions,
Kara, Tim, and Anna should file a
statement of authority with the secretary
of state or other appropriate state authority.
The statement of authority will
give public notice that Anna does not
have authority to sign real estate transfer
documents on behalf of the partnership.

7. Janet is a partner in a 10-partner partnership
located in a state that follows the UPA
1997. If Janet decides to withdraw from the
partnership before its duration lapses, what
are the possible outcomes to the partnership
and the remaining partners?

If Janet withdraws from an active partnership
formed under the UPA 1997,
Janet will become dissociated from the
partnership. The partnership will not
necessarily be dissolved, but Janet will
lose her right to participate in the management
and conduct of the partnership
business. She will no longer be able to
act on behalf of the partnership, except
to assist with winding up the partnership
(if necessary). In addition, Janet will no
longer be liable for any debts and obligations
of the partnership incurred after
her dissociation.

Janet may have the right to have her
interest in the partnership purchased
by the remaining partners as provided
in state statute or the partnership
agreement.

What if the partnership is located in a state
that follows the UPA 1914?

In states that follow the UPA 1914 in this
regard, the partnership is dissolved
whenever one partner withdraws. However, the remaining partners are free to
form a new partnership without Janet.

8. Suppose that three retirees form a partnership
to own and operate a horse ranch.
They all plan to work at the ranch and
board horses to supplement their retirement
income. If the business does not go as
planned, and the retirees earn no income
from the ranch, do they still have a valid
partnership?

Yes

Why or why not?

The partnership was formed with the intent
to earn a profit. The fact that no
profit was earned does not make it an
invalid partnership.

9. Suppose that Ken, Bill, and Mary form a
partnership to build and lease a strip mall.
The partners agree that Ken will be responsible
for securing the location on which to
build the mall. Ken selects a site that turns
out to have poor soil quality, and the project
suffers several setbacks before they finally
decide it is not feasible, and the partners
decide to go their separate ways. If the
partnership funds have all been exhausted,
and the partnership still owes $20,000 to an
environmental engineering firm that Ken
hired, who must pay?

Unless the partnership agreement indicates
otherwise, all three partners are
equally responsible for the debt of the
partnership.

What if Ken and Mary have no substantial
personal assets, but Bill has $30,000 in the
bank?

All three partners are still responsible
for the debt, but as a practical matter,
the creditors may choose to go after Bill
for payment. Bill could try to collect
from Ken and Mary at some future date
if they acquire cash or assets.

10. Suppose that the three partners of a partnership
have a falling out, and two of them stop
communicating, leaving the third partner to
wind up and dissolve the partnership. The
third partner claims she is entitled to compensation
for her time spent winding up the
partnership, but the other partners claim that,
unless agreed to in a partnership agreement,
partners are not entitled to compensation for
their time spent on partnership business. Assuming
that their partnership agreement is
silent on the matter, who is right? Why?

Although partners typically have no
right to compensation for their services
rendered on behalf of the partnership,
there is an exception for a partner who is
left to wind up the partnership business.
The partner who wound up the business
of the partnership would be entitled to
compensation for her time.