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Multiple Choice
If two attorneys operate their practice as a partnership, which of the following statements is correct regarding their business organization?
A
Each attorney's liability is limited to their investment in the partnership.
B
The partnership is taxed as a separate legal entity from the attorneys.
C
The partnership must issue shares of stock to the attorneys.
D
Both attorneys are personally liable for the debts of the partnership.
Verified step by step guidance
1
Understand the concept of a partnership: A partnership is a business organization where two or more individuals share ownership, profits, and liabilities. Unlike corporations, partnerships do not issue shares of stock, and the owners are personally liable for the debts of the business.
Clarify the liability aspect: In a partnership, the partners are personally liable for the debts of the business. This means that if the partnership incurs debts, creditors can pursue the personal assets of the partners to satisfy those debts.
Explain taxation for partnerships: Partnerships are not taxed as separate legal entities. Instead, they are considered 'pass-through' entities, meaning the income or losses of the partnership are reported on the individual partners' tax returns.
Address the incorrect statements: The statement that each attorney's liability is limited to their investment in the partnership is incorrect because partnerships do not offer limited liability unless they are structured as limited liability partnerships (LLPs). Similarly, partnerships do not issue shares of stock, as this is characteristic of corporations.
Conclude with the correct statement: The correct answer is that both attorneys are personally liable for the debts of the partnership, which aligns with the fundamental characteristics of a general partnership.