Question

Facts for Questions 19 & 20:
Roberto and Maria are general partners in a general partnership. They have entered into a partnership agreement which provides as follows: 1. Roberto is to contribute $100,000 to the partnership. 2. Maria is to contribute $200,000 to the partnership. 3. Roberto is to have a 1/3 ownership interest; and Maria is to have a 2/3 ownership interest. 4. Roberto is to receive 40% of all profits earned by the partnership, and Maria is to receive 60% of all profits. 5. Roberto and Maria are to each be responsible for 50% of all losses or other obligations of the partnership. Roberto has a net worth of about $400,000, all in bank accounts. Maria has a net worth of about $4 Million, all in a stock-brokerage account.

In Year 1 of operations, the company has a disastrous year financially! They lose $500,000. Roberto and Maria each contribute another $250,000, to make up for the loss, reducing Roberto’s net worth down to $150,000, and Maria’s net worth down to $3.75 Million. In Year 2, they lose another $400,000! Roberto pays into the business all that he can - $150,000. Maria pays in the other $250,000, so the company can keep going. In Year 3, the company finally breaks even, but a customer sues for $2 Million in physical harm when the product they sell explodes and results in the customer losing both of his legs. The customer wins in court, and gets a judgment against the partnership for the full $2 Million. The company has virtually no assets left.

19. The customer can take his judgment and:
a.   claim $2 Million of Maria’s stocks. Maria will have to seek reimbursement from Roberto for his 50% responsibility.

b.   claim $1 Million of Maria’s stocks. The customer will have to get the rest from Roberto when (and if) Roberto ever gets any more net worth.

c.   claim $1 Million of Maria’s stocks. The customer will have a claim on any assets that Roberto gets in the future, until his $1 Million is paid off. In the meantime, the customer can get a portion of Roberto’s monthly paychecks by turning in a “garnishment” order to his payroll office.

20. True or False     If Maria and Roberto had set up a corporation or LLC, instead of a general partnership, they could have limited their individual liability for debts of the company, to just what they had invested.

Answer 1

19. Since it is a partnership firm, each partner is acting as a Pricipal and Agent for one another. All the Partners are responsible for the actions done by any of the partner. In this case since Robert is not having any other Personal Assets, the customer can take his judgment and claim $2 Million of Maria’s stocks. Maria will have to seek reimbursement from Roberto for his 50% responsibility.

20. It is TRUE that If Maria and Roberto had set up a corporation or LLC, instead of a general partnership, they could have limited their individual liability for debts of the company, to just what they had invested. Unlike a Partnership which has unlimited liability and a Corporation or LLC is having Limited Liability Feature, meaning if they had set up an LLC instead of Partnership, the liability of the Owners (Maria & Roberto) is limited to their cpaital contributions and the creditors cannot claim the owners personal assets.