Jones, Smith, and Bay wanted to form a company called ABC 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 ABC through his current company, XYZ, 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
Explanation:
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").
Question 702:
Sam, CPA, is one of the partners in a limited liability partnership with other CPAs. Sam avoids personal liability for:
A. The wrongful acts of employees acting under his supervision.
B. His own negligent acts.
C. The malpractice of his partners regarding errors and omissions.
D. The negligent actions of his subordinates under his direct control.
Correct Answer: C
Explanation:
Choice "c" is correct.
Rule: A partner in a LLP is personally liable for tort liabilities arising from his own negligence and the
negligence of his direct subordinates and for breach of contract damages. He is NOT personally liable for
the negligent actions committed by his partners.
Choices "a", "b", and "d" are incorrect, per the above rule.
Question 703:
A limited liability partnership must:
A. File registration documents with the state in which it is formed.
B. Hold all partners personally liable for all debts and liabilities of the partnership and partners.
C. Carry no less than one hundred thousand dollars of property insurance.
D. Not have partners with professional licenses.
Correct Answer: A
Explanation:
Choice "a" is correct.
Rule: To have limited liability, an LLP must file with the state a registration statement usually referred to as
Articles of LLP. It is generally designed for professionals who desire to be partners with other like
professionals and yet not have liability for the malpractice of their partners. Some states require that
personal liability insurance (not property insurance) be carried to protect those harmed by the
professionals' malpractice.
Choices "b", "c", and "d" are incorrect, per the above rule.
Question 704:
Fil and Breed are 50% partners in AandB Company, a used-car dealership. AandB maintains an average used-car inventory worth $150,000. On January 5, National Bank obtained a $30,000 judgement against Fil and Fil's child on a loan that Fil had cosigned and on which Fil's child had defaulted. National sued AandB to be allowed to attach $30,000 worth of cars as part of Fil's interest in AandB's inventory. Will National prevail in its suit?
A. No, because the judgement was not against the partnership.
B. No, because attachment of the cars would dissolve the partnership by operation of law.
C. Yes, because National had a valid judgement against Fil.
D. Yes, because Fil's interest in the partnership inventory is an asset owned by Fil.
Correct Answer: A
Explanation:
Choice "a" is correct. A partner has no right to possess partnership property except for partnership
purposes. Thus, a personal creditor of a partner has no right to attach items of partnership property to
satisfy a partner's personal debt.
Choice "b" is incorrect. There is no such rule. If the partnership were liable for the individual partner's debt,
the cars could be attached and the partnership would not be dissolved.
Choice "c" is incorrect. A partner has no right to possess partnership property except for partnership
purposes. Thus, a personal creditor of a partner has no right to attach items of partnership property to
satisfy a partner's personal debt.
Choice "d" is incorrect. A partner has no right to possess partnership property except for partnership
purposes. Thus, a personal creditor of a partner has no right to attach items of partnership property to
satisfy a partner's personal debt.
Question 705:
Berry, Drake, and Flanigan are partners in a general partnership. The partners made capital contributions as follows: Berry, $150,000; Drake, $100,000; and Flanigan, $50,000. Drake made a loan of $50,000 to the partnership. The partnership agreement specifies that Flanigan will receive a 50% share of profits, and Drake and Berry each will receive a 25% share of profits. Under the Revised Uniform Partnership Act and in the absence of any partnership agreement to the contrary, which of the following statements is correct regarding the sharing of losses?
A. The partners will share equally in any partnership losses.
B. The partners will share in losses on a pro rata basis according to the capital contributions.
C. The partners will share in losses on a pro rata basis according to the capital contributions and loans made to the partnership.
D. The partners will share in losses according to the allocation of profits specified in the partnership agreement.
Correct Answer: D
Explanation:
Choice "d" is correct. Under the Revised Uniform Partnership Act, unless agreed otherwise, partners share losses in the same manner that they share profits. Choice "a" is incorrect. Under the Revised Uniform Partnership Act, unless agreed otherwise, partners share losses in the same manner that they share profits. Here, the partners agreed to share profits in a
2:1:1 ratio. Thus, losses will be shared in that manner rather than equally. Choice "b" is incorrect. Under the Revised Uniform Partnership Act, unless agreed otherwise, partners share losses in the same manner that they share profits. They are not shared in accordance with the partners' capital contributions. Choice "c" is incorrect. Under the Revised Uniform Partnership Act, unless agreed otherwise, partners share losses in the same manner that they share profits. They are not shared in accordance with the partners' capital contributions or loans.
Question 706:
Under the Revised Uniform Partnership Act, which of the following have the right to inspect partnership books and records?
A. Employees.
B. Former partners.
C. Inactive partners.
D. Transferees of partners' interests.
Correct Answer: C
Explanation:
Choice "c" is correct. Every partner in a partnership - whether active or inactive - has the right to inspect
the partnership's books and records.
Choice "a" is incorrect. Only a partner has a right to inspect the partnership's books and records; an
employee of the partnership has no such right.
Choice "b" is incorrect. Only current partners have a right to inspect the partnership's books and records;
former partners do not have such a right.
Choice "d" is incorrect. Only partners have a right to inspect a partnership's books and records. A
transferee of a partner's interest has only the partner's right to distributions.
Question 707:
Leslie, Kelly, and Blair wanted to form a business. Which of the following business entities does not require the filing of organization documents with the state?
A. Limited partnership.
B. Joint venture.
C. Limited liability company.
D. Subchapter S corporation.
Correct Answer: B
Explanation:
Choice "b" is correct. A joint venture is like a partnership. A partnership or joint venture can be formed
without filing any documents with the state.
Choice "a" is incorrect. Formation of a limited partnership requires the filing of a certificate of limited
partnership with the state.
Choice "c" is incorrect. A limited liability company may be formed only by filing articles of organization with
the state.
Choice "d" is incorrect. A corporation, including a Subchapter S corporation, may be formed only by filing
articles of incorporation with the state.
Question 708:
Smith and James were partners in S and J Partnership. The partnership agreement stated that all profits and losses were allocated 60 percent to Smith and 40 percent to James. The partners decided to terminate and wind up the partnership. The following was the balance sheet for S and J on the day of the windup:
Of the total accounts receivable, $10,000 was collected and the remainder was written off as bad debt. All liabilities of S and J were paid by the partnership. The property and equipment are sold for $32,000. Under the Uniform Partnership Act, what amount of cash was distributed to Smith?
A. $25,200
B. $26,000
C. $30,000
D. $34,800
Correct Answer: A
Explanation: Choice "a" is correct. Upon termination of the partnership creditors are paid first. After payment of creditors, each partner is deemed to have an account that is charged or credited an amount equal to the partner's contribution plus or minus the partner's share of any profits or losses. The agreement between Smith and James was that profits and losses would be allocated 60% to Smith and 40% to James. The partnership had $82,000 in assets ($40,000 in cash, $10,000 from accounts receivable, and $32,000 from property and equipment). The partnership had $90,000 in liabilities and
capital. Of the $82,000 in assets, $24,000 is paid first to creditors. This leaves a balance of $58,000.
Smith contributed $30,000 in capital and James contributed $36,000 in capital. With $66,000 owed in
capital and only $58,000 available, there is a deficit of $8,000. By agreement, Smith is responsible for 60%
of the $8,000 deficit or $4,800.
Smith would be credited an amount equal to his capital ($30,000) minus his share of the loss ($4,800) or
$25,200. Only choice "a" reflects this amount.
Choices "b", "c", and "d" are incorrect, per the above calculation.
Question 709:
Under the Uniform Partnership Act, which of the following statements is(are) correct regarding the effect of the assignment of an interest in a general partnership?
I. The assignee is personally responsible for the assigning partner's share of past and future partnership debts.
II.
The assignee is entitled to the assigning partner's interest in partnership profits and surplus on dissolution of the partnership.
A.
I only.
B.
II only.
C.
Both I and II.
D.
Neither I nor II.
Correct Answer: B
Explanation: Choice "b" is correct. A partner may assign his or her interest in the partnership. The effect of such an assignment is to transfer the partner's right to receive the partner's share of profits or surplus only. Such an assignment does not cause dissolution or make the assignee a new partner. The assignor is still regarded as a partner and is liable for past and future partnership debts. The assignee, since he is not a partner, is not liable for past and future partnership debts. Choice "a" is incorrect. The assignee of an interest in a general partnership is not personally responsible for the assigning partner's share of past and future partnership debts but is entitled to the assigning partner's interest in partnership profits and surplus on dissolution of the partnership. Choice "c" is incorrect. The assignee of an interest in a general partnership is entitled to the assigning partner's interest in partnership profits and surplus on dissolution of the partnership but is not personally responsible for the assigning partner's share of past and future partnership debts. Choice "d" is incorrect. The assignee of an interest in a general partnership is entitled to the assigning partner's interest in partnership profits and surplus on dissolution of the partnership but is not personally responsible for the assigning partner's share of past and future partnership debts.
Question 710:
If no provisions are made in an agreement, a general partnership allocates profits and losses based on the:
A. Value of actual contributions made by each partner.
B. Number of partners.
C. Number of hours each partner worked in the partnership during the year.
D. Number of years each partner belonged to the partnership.
Correct Answer: B
Explanation:
Choice "b" is correct. Absent an agreement to the contrary, all partners have equal rights to share in the
profits of the partnership.
Choices "a", "c", and "d" are incorrect, per the above explanation.
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