ARE Live: Practice Management Mock Exam False information about General Partnerships

Practice Management
1

11:54 False Statements re: General Partnerships
The reality of a General Partnership is much more risky
than the presenter seems to realize when he says:

 "..with this structure the partnership acts as an intermediary 
 between any claims and the partner's personal assets.
 A claim can be brought against a firm but not against the individual..."

This not correct.
General Partnerships do not offer any protection of personal assets to the partners.
If the firm is sued, partners’ personal assets can be taken if the firm cannot pay.

The AHPP states:
“Each general partner is potentially liable for the actions of the other partners;
a partner’s liability may extend beyond one’s partnership interest,
to reach the partner’s personal assets as well.
A general partnership does not pay federal taxes;
each partner’s share of income and losses is passed through
and reported on the individual’s tax return.”

If your partner becomes liable to pay a financial judgment due to his work at the firm, and if the firm’s funds and his funds are exhausted and there are still outstanding fees to be collected, the court can take your personal assets as well. (This is actually riskier than a Sole Proprietorship, because at least you are only personally liable for your own mistakes.)

The speaker also does not clearly distinguish the way in which a GP files taxes with the IRS, and if a listener wasn’t already familiar with the subject and wasn’t listening very carefully they might come away with the impression that a GP files taxes returns to the IRS, when in fact they only file an informational return, and the real tax returns are filed by the partners only.
Just for clarity:
Here is a direct quote from the IRS: (Partnerships | Internal Revenue Service)

“A partnership must file an annual information return
to report the income, deductions, gains, losses, etc., from its operations,
but it does not pay income tax.
Instead, it “passes through” profits or losses to its partners.
Each partner reports their share of the partnership’s income or loss
on their personal tax return.”

The speaker refers the listener to the AHPP page 200 which aligns with the IRS code,
and does a much better job stating what is going on.

Furthermore, at timecode 13:41, the speaker says:
"…the LLP can also pay the taxes as a business itself… "
Not true.
LLPs, like GPs do not pay any taxes directly to the IRS.
In both cases the partners pay taxes individually.

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hey @aidenjh thanks for writing in!

What the speaker is saying isn’t false, and neither is what you’re saying! The speaker is saying that a GP acts as an intermediary, in terms of liability, between claims and the partners themselves. This is true - if the GP owes money to someone, the GPs assets are first in line to pay that debt. If those assets are exhausted, then yes, the partners are personally liable. In that respect, the GP is an intermediary between any potential debts the GP owes and the partner’s personal assets.

I agree with what you say about how taxes work for this type of firm structure. The speaker doesn’t contradict any of that - they’re just going over it somewhat quickly because this is a 30 minute podcast where General Partnerships are one answer choice for one of several questions.

Hope that helps and glad you’re going into the ARE Live archives to study! It’s a great way to supplement our study materials.

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OK - I guess I do see your point. In that sense, the GP is a sort of first line defense against liability - as long as it has assets.
This is of course a completely different kind of liability protection, but if the firm’s finances are substantial, it could be quite meaningful.

5

Then why does the AHPP Table 5.1 say there is NO liability protection for personal assets?

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Hi @Citrillion - I deleted your snapshot from AHPP because we can’t allow posting of copyrighted content on the community.
To answer your question - AHPP is not error proof and the concept of ‘liability protection’ isn’t necessarily concrete. I would say that being in a GP that has assets provides some level of liability protection that you don’t get if, say, you’re practicing under your own name and have no insurance. In that respect, the GP offers some level of liability protection when compared to this alternative. It also offers less liability protection than, say, operating as a corporation with great insurance.
I think the takeaway should be that there are plenty of better ways to go into business, and have more liability protection, than the very small amount that a GP could potentially provide.

7

How am I going to pass a test when I can’t rely on the primary study material published by the AIA and billed as ‘The definitive guide to architectural practice.’?

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@Citrillion I really feel for you on this. I have the same frustration. I know that it isn’t a large percentage of the information - but any uncertainty in one area raises concern for us candidates overall - because we start to lose confidence in any one particular detail, wondering - “Is this one of those things that will turn out to be false?” With that kind of dynamic - learning is fundamentally unpleasant - because part of the joy of learning is building mental model infrastructure that feels permanent or “real” in some sense. For that we need very high confidence in the basic data we are training on.

I have asked NCARB if they would consider providing ARE prep DIRECTLY to candidates so that we can be certain that the people who are making the test are also the people who are defining the prep material data points. Of course this doesn’t ensure that either one will be based in the real world (we would hope so…) but at least, for the purposes of the test, our confidence level could be high.

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I wouldn’t necessarily rely on NCARB either tbh. I’ve noticed even in their test exam they have 2 questions from PDD which have nothing to do with PcM - dimensioning et al. NCARB is likely not in a position to do it financially given their limited means of membership and the fact many practicing architects do not technically have to keep their account current with them to maintain their license. I think AIA needs to step up a little more given the The Architectural Handbook to Professional Practice is over a decade old and covers IDP instead of AXP among other issues - their own contracts are also changing

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Yeah - I noticed the dimensioning / sheet prep questions and wondered if I had missed something drastically unexpected. Oy veh. So weird that there is a profession without deeply vetted authoritative documents / standards. Or perhaps all professions are a bit rough around the edges? I’d have to have a lot more life experience to really know for sure.

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@Citrillion @aidenjh @avatarlucas I totally understand where you’re all coming from and empathize with your frustration. When I was studying for the ARE a few years ago, I would get caught up in analyzing the multiple sources out there and become overwhelmed when there were apparent discrepancies or differing pieces of information. I spent a lot of time trying to nail down the nitty gritty of the various topics covered on the ARE, which (now looking back) wasn’t the best use of my time. Throughout my ARE journey, I learned the following - and hope it can help you too as you power through these exams!

  • Architecture is not black and white. Many components of the profession are subjective and vary from jurisdiction to jurisdiction, firm to firm, architect to architect.
  • The ARE tests the competency of candidates across the entire country, which is why a consistent standard must be used across all exams (despite the varying opinions or practices out there).
  • The ARE is developed by NCARB. Ultimately, the answers you provide on the exam need to be the ones that NCARB considers correct. There’s no sense in trying to dispute that - accept it and play by the “NCARB rules” when answering questions.
  • Understanding how where NCARB gets their content and how they use it to develop ARE items will help with this.
  • Black Spectacles uses NCARB’s recommended sources to create study materials (in concise, digestible formats) and the same rigorous process in creating practice questions. While the content we provide may not align directly with what your firm does or what you’ve seen in your experience, we ensure that it aligns with what you’ll be tested on with the ARE.
  • Try not to get caught up in the nitty gritty details. Know the general rules of thumb per NCARB guidelines and practice applying them to practice questions. Always ask yourself, “What would NCARB do?” to remind yourself to take an objective approach when providing answers that NCARB is looking for.

I know it’s not as simple as it sounds, but hopefully this helps you know that you’re not alone and the ARE takes more than just learning the content - it’s also about applying your knowledge to the ARE (NCARB) specific format and eliminating those external stressors that might affect your exam performance.

Lastly, I appreciate you all for engaging in this discussion and collaborating with one another. The ARE can often feel like an isolated journey and it helps to hear insights of others who are on the same journey.

Best of luck to you all!

Kiara Galicinao, AIA, NCARB
Product Coordinator
Black Spectacles

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Thanks for your response and support @kiaragalicinao. It is much appreciated. :slightly_smiling_face: When you say NCARB guidelines do you mean the ARE 5.0 Guidelines published by NCARB?

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You are very welcome @Citrillion! Yes, I am referring to the ARE 5.0 Guidelines from NCARB in how the ARE is structured and each division broken into sections/objectives.

When I said NCARB guidelines, I am generally referring to the content and rules of thumb per NCARB and the sources used to develop the ARE. Basically - what NCARB deems correct on the ARE, as opposed to what another source may consider “correct”. This previous post below is a great example of this distinction and why there can be gray areas when studying for the ARE:

Hope this helps!

Kiara

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@kiaragalicinao & @coachchrishopstock Thank you for this reference. It is a good example. I like the detailed insight into someone else’s thinking process.

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