Question
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
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.
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.
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.
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