Norma and Janet Decided to Form a Partnership for Selling

question 174

Multiple Choice

Norma and Janet decided to form a partnership for selling gourmet picnic baskets. To raise sufficient capital, they convinced their mothers to invest $5000 each as limited partners. Norma's mother was an experienced restaurateur and watched the business with great interest. On several occasions, she advised them on the business and contacted old business associates to buy surplus stock. She even filled in taking orders in the office when needed. A customer who was made ill by contaminated food from a tin can supplied in one basket sued. What would be the liability, if any, of the mothers?

• A) Janet's mother would be liable for $10,000, twice the amount invested, because she failed to take part in the management of the business.
• B) A limited partner has her liability limited to the amount of her initial investment; therefore, neither mother has any further liability.
• C) Both mothers would have unlimited liability because they contributed money but not services as required.
• D) Norma's mother would have unlimited liability because she took part in the management of the business and therefore became a general partner.
• E) Because one mother lost her limited liability status, they both do.

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Definitions:

Call Option

A contract which allows an investor the option, without being required, to purchase a stock, bond, commodity, or any other financial instrument at a predetermined price during a certain time frame.

Exercise Price

The specified price at which the holder of an option can buy or sell the underlying asset.

Stock Price

The cost of purchasing a share of a company's stock, determined by supply and demand in the market.

Call Option

A financial contract that gives the buyer the right, but not the obligation, to purchase an asset at a specified price within a certain time frame.