Norma and Janet decide to form a partnership to sell gourmet picnic baskets.To raise sufficient capital,they convince their mothers to invest $5000 each as limited partners.Norma's mother is an experienced restaurateur and watches the new business with great interest.On several occasions,she advises Norma and Janet on the business and contacts former business associates to buy surplus stock.She even fills in by taking orders in the office when needed.A customer who was made ill by eating contaminated food from a tin can supplied in one picnic basket sues.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)Because one mother lost her limited liability status,they both do.
D)Norma's mother would have unlimited liability because she took part in the management of the business and thus becomes a general partner.
E)Both mothers would have unlimited liability because they contributed money but not services as required.

Question

Quizplus · Accepted Answer

Norma's mother would have unlimited liability because her active participation in the management of the business and her involvement in activities such as advising on the business, contacting associates, and taking orders, effectively changes her status from a limited partner to a general partner. Limited partners typically have their liability limited to their investment amount, provided they do not participate in the management of the business. Since Norma's mother did participate, she loses her limited liability protection.

Norma and Janet Decide to Form a Partnership to Sell