Which of the following is a characteristic of a partnership? a.The partners have limited liability. b.The partnership is subject to federal income tax. c.The partnership has a limited life. d.The partnership distributes only net income to partners, but does not distribute net losses.
The Correct Answer and Explanation is:
The correct answer is c. The partnership has a limited life.
Explanation:
A partnership is a business structure where two or more individuals share ownership and management responsibilities. Here’s a breakdown of each option to explain why “c” is correct:
- a. The partners have limited liability.
This statement is incorrect. In a general partnership, partners do not have limited liability. They have unlimited liability, meaning they are personally responsible for the debts and obligations of the partnership. This is one of the key differences between a partnership and a corporation, where shareholders generally have limited liability. - b. The partnership is subject to federal income tax.
This option is also incorrect. A partnership is not taxed as a separate entity under federal law. Instead, the partnership itself does not pay taxes. Instead, it is considered a “pass-through” entity. The income or losses of the partnership pass through to the individual partners, who report them on their personal tax returns. This is another distinction from corporations, which are taxed separately. - c. The partnership has a limited life.
This is the correct answer. A partnership has a limited life, meaning that the business entity will dissolve if one of the partners leaves or dies unless there is a prior agreement stating otherwise. The partnership’s continuity is tied to the life of its partners, and unless otherwise stipulated, it does not survive indefinitely. This limited life contrasts with corporations, which continue to exist regardless of changes in ownership. - d. The partnership distributes only net income to partners, but does not distribute net losses.
This statement is incorrect. Partnerships typically distribute both net income and losses to their partners. The allocation of income and losses is usually specified in the partnership agreement, and it can be done in various ways, depending on what the partners agree upon.
Thus, the main characteristic that defines a partnership in this context is the limited life of the business.
