California Real Estate Practice Exam

In a general partnership, what happens to the personal assets of a partner when creditors demand repayment?

1. Creditors cannot touch personal assets of any partner.

2. Personal assets are protected if only one partner is involved.

3. Personal assets of the partners can be used to meet business debts.

4. There is insurance to cover these scenarios.

The correct answer is: Personal assets of the partners can be used to meet business debts.

In a general partnership, the personal assets of the partners can indeed be used to satisfy the partnership's business debts. This is a fundamental characteristic of general partnerships, where all partners share equal responsibility for the debts and obligations of the business. This means that if the partnership cannot meet its financial obligations, creditors have the right to pursue the personal assets of any individual partner to recover their debts. The legal structure of a general partnership does not limit liability; partners are jointly and severally liable. Consequently, if the business fails or incurs debts, each partner's personal assets, such as savings accounts, real estate, or other valuables, may be at risk if the creditors seek repayment. This aspect distinguishes general partnerships from other business structures like limited partnerships or corporations, where personal liability can be limited. Thus, understanding the risks involved in a general partnership is crucial for potential partners as they consider entering such business arrangements.