(ACC 003 – Fundamentals of Accounting Part 2)

Lesson title: Defining Partnership References

Lesson Objectives: https://www.investopedia.com/term
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A. LESSON PREVIEW/REVIEW
1) Introduction
What is partnership? To answer that, a partnership is a formal arrangement between two or
more parties to manage and operate a business and share its profit. There are several types of
partnership arrangements. The two most common are general and limited partnership. In general
partnership, the partners need to manage the company and assume responsibility for the debts
and other obligations in the partnership. While in limited partnership has both general and limited
partners. The general partners own and operate the business and bear liability for the partnership,
while the limited partners serve as investors only; they likely have no control over the company and
they are not subject to the same liabilities as the general partners. There also the so-called “silent
partner” in which one party is not involved in the day-to-day operations of the business.
Professionals like doctors and lawyers often form a limited partnership. There may be tax benefits
to a partnership compared to some corporation. If you expect to have many passive investors,
limited partnerships are generally not the best choice for a new business due to all the required
filing and administrative complexities. A general partnership would be much easier to form if you
have two or more partners who wants to be actively involved.

B. MAIN LESSON
A partnership can be any endeavor undertaken jointly by multiple parties. Some parties
may be governments, non-profits enterprises, businesses, or private individuals. The goals of a
partnership also vary widely. Tax treatment is one of the major advantages of a partnership. A
partnership that doesn’t pay tax on its income but “passes through” any profits or losses to the
individual partners. Within narrow sense of a for-profit venture undertaken by two or more
individuals, there are three main categories of partnership: general partnership, limited partnership,
and limited liability partnership. Let’s talk about the general partnership first. Personal liability is a
major concern in general partnership to structure your business. Just like sole proprietors, general
partners are personally liable for the partnership’s obligations and debts. General partner can act
on behalf of the partnership to take out loans and make decisions that will affect and be binding on
all the partners if it is in the partnership agreement permit. You should remember and keep on
mind that partnerships are also more expensive to establish than sole proprietorships because they
require more legal and accounting services. If you’re going to make your business as a
partnership, be sure you draft a partnership agreement that shows and details how business
decisions are made, how disputes are resolved and how to handle a buyout. This agreement will
give you assurance and you’ll be glad you made this when you run into difficulties with one of the
partners or if someone wants out of the arrangement. When making the agreement, should
address the purpose of the business and the authority and responsibility of each partner. It is a

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 (ACC 003 – Fundamentals of Accounting Part 2)
good idea to consult an attorney who is experienced with small businesses for help when drafting
the agreement. Here are some issues you want to address in the agreement. The first one is how
will the ownership interest be shared? It’s not mandatory however, if you decide to do it, make sure
the proportion is stated clearly in the agreement. Next is how will decisions be made? Voting rights
is a good idea to establish in case a major disagreement arises. When the two partners own the
business 50-50 portion, there is the possibility of a deadlock. To avoid this, some businesses give
an advance for a third partner, a trusted associate who may own only 1 percent of the business but
whose vote can break a tie. Third is when one partner withdraws, how will the purchase price be
determined? Well the possibility of this is to agree on a neutral third party, such as your banker or
accountant, to find an appraiser to determine the price of the partnership interest. Lastly, if a
partner withdraws from the partnership, when will the money be paid? Well this will depend on the
partnership agreement where you can agree that the money be paid over three, five or 10 years
with interest. You don’t want to be hit with cash-flow crisis if the entire price has to be paid on the
spot on one lump sum. Limited liability partnerships are common structure for professionals, like
accountants, lawyers, and architects. This arrangement limits partner’ personal liability so that if
one partner is sued for malpractice, the assets of the other partners are not a risk. There are some
law and accounting firms that make further distinction between equity partners and salaried
partners. The latter is more senior than associates but does not have an ownership stake. Based
on the firm’s’ profits, they are generally paid bonuses. Limited partnerships are a hybrid of general
partnerships and limited liability partnerships. It provides a greater shield from liability for its
general partners. Partnerships do not pay income tax. The tax passes through to the partners, who
are not considered employees for tax purposes. Individuals in partnerships may receive more
favorable tax treatment than if they founded a corporation. That is, corporate profits are taxed, as
are the dividends paid to owners or shareholders. Partnerships' profits, on the other hand, are not
double-taxed in this way.

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