AICPA Exam CPA-Business Topic 2 Question 112 Discussion

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.