Sample multiple choice questions

Tricky, Esthero, and Macy decide to go into business together to promote new recording artists of alternative music genres, calling the business “Alternative Universe.” Assume for purposes of the following questions only, that they have chosen to operate the business as a general partnership, and that the partnership is formed in a jurisdiction that has adopted the Uniform Partnership Act (UPA). Tricky invested $1,000, Macy invested $9,000, and Esthero didn’t invest any capital. Macy also loaned the business an additional $50,000 to be paid back at a fixed interest rate over a period of five years.

1) Assume for purposes of this question only that the partnership agreement is silent as to how profits will be split. If the business makes profits in the first year, how will these profits be allocated among the three investors’ capital accounts?

a) They are each entitled to 1/3 of the profits, unless they agree otherwise.

b) Tricky is entitled to 10%, Macy 90%, and Esthero nothing, unless they agree otherwise.

c) They are each entitled to reasonable compensation for any work performed on behalf of the partnership.

d) Both a and c.

e) Both b and c.

2) Assume for purposes of this question only that Tricky, Esthero, and Macy initially agreed to split the profits 30%, 10%, and 60%, respectively, but their agreement was silent as to losses. If the business loses money in the first year, how would the parties share the loss.

a) They would each bear 1/3 of the loss.

b) Tricky would bear 10% of the loss, Esthero none of the loss, and Macy would bear 90% of the loss.

c) Tricky would bear 30% of the loss, Esthero 10%, and Macy 60%.

d) Macy would not have to share any of the loss until her loan is repaid.

e) None of the above.

3) Relations between Macy, Tricky and Esthero break down altogether. Macy is frustrated because Tricky and Esthero always vote against her on major decisions and she feels that she has no meaningful say in the business. Macy wants out of the partnership, so she withdraws from the partnership and assigns her partnership interest to another musical artist in the same genre who wants to invest. Which of the following best describes the legal consequences of this withdrawal and transfer?

a) The original partnership (between Tricky, Esthero, and Macy) automatically dissolves upon the transfer of Macy’s interest, and a new partnership was formed with the new artist.

b) The original partnership automatically dissolves upon Macy’s express intent to withdraw, but no new partnership was formed.

c) The original partnership does not dissolve, and the new artist is now entitled to Macy’s share of the profits and the limited right to inspect the books and vote on fundamental changes in the partnership.

d) Macy had no authority to assign her partnership interest; therefore the assignment is invalid.

e) None of the above.

4) Prithy wants to go into business providing classroom instruction and tutoring for students taking the LSAT. She wants to call it “The Prithy Review.” She seeks legal advice about what business form she should use and decides to incorporate. Before she gets a chance to file the documents with the Secretary of State, she learns about a great deal for a lease on office space, and that she must sign the lease immediately if she doesn’t want to lose it. On Nov. 1 she entered into a 5 year lease, and signed it “Prithy Prina, President, The Prithy Review, Inc., a Delaware corporation.” On Nov. 8 she incorporates the business as a California corporation.

The business has been losing money and six months later, The Prithy Review, can no longer afford to pay rent. If the landlord sues for breach of contract, which of the following statements is true:

a) The court will pierce the corporate veil to hold Prithy liable.

b) The court will hold Prithy personally liable since The Prithy Review was defectively incorporated.

c) Both The Prithy Review and Prithy, individually, may be held liable.

d) Only The Prithy Review would be held liable because of the limited liability protection of corporations.

e) None of the above.

5) Which of the following statements about the bylaws of a Delaware corporation is false?

a) The titles and general duties of the corporate officers are often specified in the bylaws.

b) If a provision in the certificate of incorporation contradicts a provision in the bylaws, the provision in the certificate of incorporation controls.

c) The board of directors must first approve an amendment to the bylaws before the shareholders can vote to amend the bylaws.

d) The bylaws typically contain many of the “ground rules” for operating the corporation.

e) None of the statements above is false.