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NEW QUESTION: 1
Harry, Betty, and Jim decide to form a hair salon business. Betty and Jim agree to equally manage the
business and have agreed to accept full personal liability for obligations of the business. Harry contributes
money to help them get started. Harry does not want any personal liability but does want access to the
books and records and to share in the profits. They have all agreed that unanimous consent is needed to
transfer their ownership interests. Assume any necessary filings have been made.
What type of business entity best reflects the terms of their agreement?
The three have formed:
A. A limited liability company.
B. A corporation.
C. A limited partnership.
D. A general partnership.
Answer: C
Explanation:
Choice "a" is correct. A limited partnership best reflects the terms of the parties' agreement. A limited
partnership has one or more general partners and one or more limited partners. The general partners are
personally liable for partnership obligations and run the business (such as Betty and Jim agreed). A
limited partner does not have personal liability for partnership obligations and does not take part in
management; however, limited partners have a right to inspect partnership books and records relevant to
their interest. Thus, a limited partnership has the attributes that Harry agreed to. Finally, all partners must
unanimously consent to a transfer of an ownership interest in a limited partnership, as the parties agreed
here. Thus, a limited partnership best reflects the agreement of the parties. Choice "b" is incorrect.
Members of a limited liability company are not personally liable for the company's debt. (They may agree
otherwise, but this is not a general attribute of a limited liability company.) Because the facts say Betty
and Jim each agreed to have full personal liability, a limited liability company does not best reflect the
parties' agreement. Choice "c" is incorrect. All partners are personally liable for all obligations of a general
partnership. Because the facts say Harry did not accept personal liability, the agreement does not reflect
a general partnership. Choice "d" is incorrect. Corporate shareholders generally are not liable for the
corporation's obligations. (They may agree otherwise, but this is not a basic attribute of a corporation.) As
the facts say Betty and Jim share full personal liability, the agreement does not reflect a corporation.


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