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CFAI Practice: M01 — Organizational Forms

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CFAI Practice: M01 — Organizational Forms

Source: CFAI Official Practice Problems 2026 Case: Dee’s Arbor Group Inc. (DAG Inc.) — timber and forest assets

Context: DAG Inc. is GP of DAG LP (limited partnership). DAG Inc. owns 80% of DAG LP. Dee family owns 30% of DAG Inc. shares. DAG Inc. is a special corporate form (pass-through, no corporate tax if all income distributed as dividends).

Questions

1. Dee family effectively owns what % of timber assets?

  • A. 24% ✓ (30% × 80% = 24%)
  • B. 30%
  • C. 80%

2. Taxation of DAG Inc. and DAG LP:

  • A. DAG LP pays tax on pre-tax income
  • B. DAG Inc. shareholders pay tax on dividend income ✓
  • C. DAG Inc. pays tax on pre-tax income

Both are pass-through entities. DAG LP passes income to partners; DAG Inc. shareholders pay tax on dividends.

3. Which best describes DAG LP and DAG Inc.?

  • A. Neither managed by majority owner
  • B. DAG Inc. limited in raising capital
  • C. DAG Inc. has unlimited liability as GP; shareholders have limited liability ✓

4. Key difference between LPs of DAG LP and shareholders of DAG Inc.:

  • A. Managerial responsibilities
  • B. Taxation of income
  • C. Voting rights to replace BOD members ✓

LPs have no voting rights; DAG Inc. shareholders (70% outside) have voting rights.

5. Rationale for complex structure:

  • A. Management control without majority ownership + limited liability ✓
  • B. Eliminates double taxation
  • C. Avoids problems with outside investors voting

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