Question

Dave and his sister Chris made unusual kites. They both created the designs; Dave made the

patterns. Friends had always wanted to buy their kites. After Chris completed a college
marketing program, she began to talk to Dave about going into business selling kites. Ed, a
friend of Chris's, wanted to be involved. He said he could buy the supplies and do other odd
chores. They decided to try to make a go of it and to share the profits as follows: Dave 35%,
Chris 35%, and Ed 30%. Things went well for 7 months. They even hired George to deliver kites
to the increased number of stores buying them. Chris and Ed became romantically involved. This
was followed by a heated dispute. Ed disappeared with $1300 collected from customers and
$600 worth of supplies, which he had bought on behalf of the business from their regular
supplier. At about the same time, George negligently broke a customer's $200 lamp when he was
delivering a kite. On these facts, which of the following is true?
A) Since Dave, Chris, and Ed did not sign a partnership agreement, they are not considered a
general partnership.
B) If the partnership funds are not sufficient to pay the partnership debts, the creditors can look
to the individual partners for payment.
C) When Ed buys supplies for the business on credit, he is acting as an agent for the business and
he alone is liable for those debts.
D) Although George broke the lamp while delivering kites, the partners are not liable, because it
was George's own fault.
E) Only Chris would be responsible Ed's misapplication of the customers' money.
B

Answer 1

The correct answer is B, as in a general partnership, each partner is personally responsible for the business's debts. The shared profits and activities infer an implied general partnership between Dave, Chris, and Ed, thus sharing liabilities, including the debts incurred by Ed and the accident caused by George.

Step-by-step explanation:

Among the given options, the answer is B: If the partnership funds are not sufficient to pay the partnership debts, the creditors can look to the individual partners for payment. This statement is true because in a general partnership, each partner is personally liable for the debts of the business. Even without a formal partnership agreement, the arrangement between Dave, Chris, and Ed shows clear intentions to form a partnership, sharing profits accordingly, which implies a general partnership with shared liabilities.

Furthermore, Ed, by buying supplies for the business on credit, is acting as an agent for the partnership, and all partners, not Ed alone, could be held liable for the debts incurred. Similarly, the partners are liable for George's accident while he was delivering kites because he was acting in the course of business, making the partnership responsible for his actions, despite it being his fault.

Partnerships are often chosen as a business structure because they can raise more capital than a sole proprietorship due to the collective assets of the partners. They also provide the advantage that each partner pays taxes only on their share of the income, avoiding double taxation. Yet, this comes at the cost of personal liability for the business's debts, which can lead to personal asset forfeiture if the business is bankrupt or involved in legal actions.