In a general partnership, what is each partner's liability for business debts?
Correct Answer
C) Unlimited personal liability
In a general partnership, each partner has unlimited personal liability for all business debts and obligations. This means personal assets can be used to satisfy business debts, regardless of which partner incurred them.
Why This Is the Correct Answer
In a general partnership, each partner has unlimited personal liability for all business debts and obligations. This means that if the partnership cannot pay its debts, creditors can pursue each partner's personal assets (homes, cars, savings) to satisfy the business obligations. Partners are jointly and severally liable, meaning each partner can be held responsible for 100% of the partnership's debts, regardless of their ownership percentage or which partner actually incurred the debt.
Why the Other Options Are Wrong
Option A: No personal liability
This is incorrect because general partners do have personal liability. No personal liability would apply to limited partners in a limited partnership or shareholders in a corporation, but not to general partners who have full exposure to business debts.
Option B: Limited to 50% of total debt
This is incorrect because liability is not automatically limited to 50% of total debt. In a general partnership, each partner can be held liable for 100% of the partnership's debts, regardless of their ownership percentage or profit-sharing arrangement.
Option D: Limited to their investment amount
This is incorrect because general partners' liability extends far beyond their initial investment. Unlike limited partners or corporate shareholders, general partners can lose their personal assets to satisfy partnership debts, even if those debts exceed their investment amount.
Memory Technique
Remember 'General = Generous with liability' - general partners are generous with their personal assets, putting everything at risk for partnership debts.
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