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Which of the following may not be treated as a
- Arnold and Willis operate a restaurant.
- Thelma and Louise establish an LLP to operate an accounting practice.
- Lucy and Desi purchase real estate together as a business.
- Jennifer and Ben form a corporation to purchase and operate a hardware store.
- All of the above are partnerships.
Introduction: Partnership forms when more than one person thrives to achieve the same objective as a business. The only difference between a partnership and a corporation is that the corporation will enjoy the benefits of limited liability but faces dual taxation first at the company level and second at the shareholders level, whereas in partnership, partnerships are taxed only at the partners level. Registration of partnership is not mandatory as it can be formed by mere handshake only. To carry a partnership with limited liability, it is important to register the business as a “limited liability partnership”.
To choose: The best option which is not a form of partnership.
Answer to Problem 1MCQ
Option ‘d. J and B form a corporation to purchase and operate a hardware store’ is correct.
Explanation of Solution
Explanation for correct answer: An ordinary partnership can be formed by a mere handshake. It can be any unincorporated organization or a joint venture but it excludes trusts, estate, or corporation and co-ownership of property because it misses the core element that is “partners must engage in a business”. Partners generally document the agreement in writing to save themselves or the entity in the case of a disagreement or disputes arising among partners. In a partnership, general partners take the risk of legal liability for the workings of the partnerships or debts of the partnership.
Entities that are treated for tax purposes in the same way as partnerships are limited partnerships, LLCs, and LLPs. Partnerships income passes through its partners, there is no tax at the entity level since partnerships are taxed at the partners’ level.
In the option d: J and B started a business by forming a corporation to purchase and operate a hardware store, according to income tax law, a partnership can be any association, joint venture, or unincorporated entity which does not include trust, estate, or a corporation. So corporations are excluded from the partnerships. Therefore the option ‘d’ is correct.
Explanation for incorrect answers: In option a: A and W operate a restaurant means A and W have started a restaurant business for income purposes, it is a partnership between A and W. Since partnership can be formed verbally and without any documentation to run a business and to make profits. So operating a restaurant is a business as its objective is to make a profit. Therefore option ‘a’ is incorrect.
In the option b: T and L establish a business and register it as a limited liability partnership (LLPs) to operate an accounting practice. Accountants and attorneys need to register their business otherwise they would attract serious consequences. Therefore, most professional individuals register their businesses before the commencement of business. Since limited liability partnerships (LLPs) are those partnerships which are registered with the government to enjoy limited liability in the partnership. So the option ‘b’ is incorrect.
In the option c: L and D are co-owners of the real estate property which they bought for business purposes. Real estate is a property business, in which property is purchased or developed and sold them later for profits. Thus, the real estate business of L and D is a partnership business. Therefore, the option ‘c’ is incorrect.
The business started by J and B as a form of corporation to purchase and operate a hardware store is not a form of partnership. Therefore, option e: all of the above are partnership is incorrect.
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