Professional Documents
Culture Documents
Partnership Formation and Operation
Partnership Formation and Operation
Partnership Formation and Operation
Partnerships:
Formation and
Operation
McGraw-Hill/Irwin Copyright © 2009 by The McGraw-Hill Companies, Inc. All rights reserved.
Alternative Legal Forms -
-7
Subchapter S Corporation
Often
Often referred
referred to
to .. .. .. Has
Hasall
all the
thelegal
legal
as
as an
an S-Corp
S-Corp characteristics
characteristicsof ofaa
corporation.
corporation.
.. .. .. Profit
Profitpasses
passesto
toowners
owners
just
justas aswith
withaapartnership.
partnership.
.. .. .. Ownership
Ownershipis
islimited
limitedto
to75
75
stockholders.
stockholders.
Owners
Ownerslimited
limitedto
toindividuals,
individuals,
estates,
estates, and
andcertain
certaintax-exempt
tax-exempt
entities
entitiesand
andtrusts
trusts
Alternative Legal Forms -
-8
Limited Partnership
Tax
Tax benefits
benefits of of aa .. .. .. A
A number
number ofof “limited”
“limited”
partnership
partnership partners
partners who who are
are not
not allowed
allowed
without
without unlimited
unlimited to
to participate
participate in in management.
management.
liability.
liability.
.. .. .. Losses
Losses are
are restricted
restricted to
to
amount
amount invested.
invested.
.. .. .. Must
Must have
have one
one oror more
more
general
general partners
partners who
who assume
assume
responsibility
responsibility for
for all
all
obligations.
obligations.
Alternative Legal Forms –
-9
.. .. .. Most
Most of
of the
the LLP
LLP laws
laws
characteristics
characteristics of of aa general
general differ
differ from
from
partnership.
partnership. state
state to
to state.
state.
EXCEPT
EXCEPT
.. .. .. Partners
Partners are
are liable
liable only
only
for
for their
their own
own acts
acts and
and
omissions,
omissions, and and the
the acts
acts and
and
omissions
omissions of of those
those under
under
their
their direct
direct supervision.
supervision.
Alternative Legal Forms –
-10
.. .. .. Classified
Classified as
as aa LLC
LLC laws
laws
partnership
partnership for for tax
tax differ
differ from
from
purposes.
purposes. state
state to
to state.
state.
.. .. .. Owners
Owners only
only risk
risk their
their
own
own investments.
investments.
.. .. .. The
The number
number ofof owners
owners
is
is notnot usually
usually restricted.
restricted.
-11
Articles of Partnership
Partnerships
Partnershipscancanexist
exist
even
evenininthe
theabsence
absenceofofaa
written
writtenpartnership
partnership
agreement.
agreement.
The
TheUniform
UniformPartnership
Partnership
Act
Actestablishes
establishes
standards
standardsandandrules
rulesfor
for
partnerships.
partnerships.
A
Awritten
writtenagreement
agreementwill
will
supersede
supersedethetheUPA
UPA
standards.
standards.
-12
Articles of Partnership
Method Method
Methodfor
Methodfor
for Profit/loss
for
dispute Profit/loss admitting
admitting
dispute sharing
settlements sharing new
newpartners
partners
settlements percentages
percentages
Initial
Initial
contribution
contributionto
Method
Methodforfor
Put
Put itit in
in be
to
bemade
madeby by
settling
settlingaa writing!!!
writing!!! each
eachpartner
partner
partner’s
partner’sshare
share
upon
upon
withdrawal,
withdrawal,
retirement
retirementoror Rights
Rightsand
and
death
death responsibilities
responsibilities
of
ofpartners
partners
-13
Articles of Partnership
Business Name
Nameand
and Description
Business Descriptionof
of
Location Address
Addressof
of the
Location theNature
Natureofof
Each
EachPartner
Partner the
theBusiness
Business
Withdrawal
Withdrawal
limits
limits
Put
Put itit in
in Life
Lifeinsurance
insurance
writing!!!
writing!!! provisions
provisions
enabling
enabling
survivor
survivor
Method
Methodforfor acquisition
acquisitionofof
valuing
valuing decedent
decedent
individual
individual interest
interest
contributions
contributions
Accounting for Capital
-14
Contributions
Contributions
IfIfthe
thepartners
partnerseacheachcontribute
contributecash
cashand
andother
other
assets
assets.. .. ..
.. .. .. debit
debitCash
Cash&&Contributed
ContributedAssets
Assetsfor
forFV.
FV.
.. .. .. credit
creditindividual
individual Partner
PartnerCapital
Capital
accounts.
accounts.
Accounting for Capital
-16
Contributions
Intangible
Intangible assets,
assets, such
such as
as expertise,
expertise,
require
require special
special consideration
consideration
Use
Use either
either the
the Bonus
Bonus Method
Method or
or the
the
Goodwill
Goodwill Method.
Method.
Record
Record the
the tangible
tangible assets
assets
contributed.
contributed.
Adjust
Adjust the
the partner
partner capital
capital
balances
balances toto reflect
reflect the
the
relative
relative value
value ofof the
the
intangible
intangible asset.
asset.
Intangible Contributions -
-17
Bonus Method
On
On 2/15/08,
2/15/08, Cookie
Cookie and
and Bijou
Bijou form
form aa
partnership.
partnership. They
They agree
agree to
to equal
equal
capital
capital balances.
balances. Cookie
Cookie contributes
contributes
$80,000
$80,000 cash.
cash. Bijou
Bijou contributes
contributes land
land
valued
valued at
at $40,000.
$40,000.
Prepare
Prepare the
the journal
journal entry
entry
to
to set
set up
up the
the partnership.
partnership.
Intangible Contributions –
-18
Bonus Method
Total
Total tangible
tangibleassets
assetsfor
forthe
thepartnership
partnershipare
are
$120,000.
$120,000. TheThepartners
partnershave
haveagreed
agreedto
tohave
have
equal
equal capital
capital balances,
balances, based
basedon
onthe
the
contributed
contributedassets,
assets, even
eventhough
though Bijou
Bijou only
only
contributed
contributedland
landworth
worth $40,000.
$40,000. Essentially,
Essentially,
Cookie
Cookiehashasgiven
given Bijou
Bijou aa$20,000
$20,000bonus.
bonus.
Intangible Contributions -
-19
Goodwill Method
Record
Recordthethetangible
tangible
assets
assetscontributed.
contributed.
Record
Recordthethe
contributed
contributed intangible
intangible
asset
assetasasthe
thedifference
difference
between
betweenthe the
contributed
contributedtangible
tangible
assets
assetsand
andthe
theimplied
implied
value
valueofofthe
the
partnership.
partnership.
Intangible Contributions -
-20
Goodwill Method
On
On2/15/08,
2/15/08, Cookie
Cookieand
andBijou
Bijouform
formaapartnership.
partnership.
They
Theyagree
agreetotoequal
equal capital
capital balances.
balances. Cookie
Cookie
contributes
contributes$80,000
$80,000cash.
cash. Bijou
Bijoucontributes
contributes
land
landvalued
valuedatat$40,000,
$40,000, and
andbrings
bringsyears
yearsofof
experience
experiencetotothe
thenew
new business.
business.
Prepare
Prepare the
the journal
journal entry
entry to
to set
set
up
up the
the partnership.
partnership.
Intangible Contributions -
-21
Goodwill Method
On
On2/15/08,
2/15/08, Cookie
Cookieand
andBijou
Bijouform
formaapartnership.
partnership.
They
Theyagree
agreetotoequal
equal capital
capital balances.
balances. Cookie
Cookie
contributes
contributes$80,000
$80,000cash.
cash. Bijou
Bijoucontributes
contributes
land
landvalued
valuedatat$40,000,
$40,000, and
andbrings
bringsyears
yearsofof
experience
experiencetotothe
thenew
new business.
business.
÷
Intangible Contributions -
-22
Goodwill Method
Cookie’s
Cookie’scapital
capital account
accountisiscredited
creditedfor
forthe
the
tangible
tangiblecontribution
contributionofof$80,000.
$80,000.
Bijou’s
Bijou’scapital
capital account
accountisiscredited
creditedfor
forthe
the
tangible
tangiblecontribution
contributionofof$40,000,
$40,000, plus
plusthe
the
intangible
intangiblecontribution
contributionvalued
valuedatat$40,000.
$40,000.
-23
Allocation of Income
Allocated
Allocated Bonuses
Bonuses
compensation
compensation
Allocation of Income
-24
Example
Mushon and Gee, a retail partnership
selling pet products, has beginning of
period capital balances of $50,000 and
$70,000 respectively. Net income for the
period is $100,000.
Both partners are credited with 10%
interest on their beginning capital
balance. In addition, Mushon is credited
with a bonus of $20,000 per the
partnership agreement. They share
income 40:60 (Mushon:Gee).
What are the ending capital balances for
each partner?
Allocation of Income
-25
Example
Allocation of Income
-26
Example
Allocation of Income
-27
Example
Allocation of Income
-28
Example
-29
Legal Dissolution
Any alteration in the specific individuals
composing a partnership automatically leads
to “legal dissolution”
Departures
Retirement
Death
Admission of a New Partner
• Promotions
• Buy-ins
Frequently this leads to the immediate
formation of a new partnership as the
business continues
Can lead to termination and liquidation
Admission of a New Partner -
-30
Prepare
Prepare the
the journal
journal entry
entry to
to
admit
admit Nia
Nia to
to the
the partnership.
partnership.
Admission of a New Partner
-35
Using
Usingthe
theGoodwill
Goodwill Approach,
Approach, prepare
preparethe
the
entry
entryassuming
assumingNia
Niapays
pays$60,000
$60,000directly
directlyto
to
the
theother
otherpartners
partnersfor
foraa20%
20%partnership
partnership
interest.
interest.
Admission of a New Partner -
-37
Prepare
Prepare the
the journal
journal entry
entry to
to
allocate
allocate goodwill
goodwill toto Mare,
Mare, Mic
Mic
and
and Roma.
Roma.
Admission of a New Partner -
-39
Goodwill
Goodwill (Revaluation)
(Revaluation) Example
Example
The
The new
new balances
balances for
for Mare,
Mare, Mic
Mic and
and Roma
Roma
appear
appear as
as follows:
follows:
Next,
Next, allocate
allocate 20%
20% from
from each
each of
of the
the
existing
existing partners
partners to
to Nia.
Nia.
Admission of a New Partner -
-41
Revaluation
RevaluationExample
Example
Note
Notethat
thatNia’s
Nia’sbalance,
balance,
after
afterallocation
allocationfrom
from
the
thecurrent
currentpartners,
partners,
equals
equalsNia’s
Nia’s
contribution
contributionofof
$60,000.
$60,000.
Admission of a New Partner -
-42
Bonus
Bonus Example
Example
Net
Netassets
assetsafter
afterthe
thecontribution
contributionare
are$200,000.
$200,000.
Nia
Niagets
getscredit
creditfor
for20%
20%ofofnet
netassets
assets($200,000
($200,000xx20%).
20%).
The
Theremainder
remainderof ofthe
the$60,000
$60,000contribution
contributionis
isallocated
allocatedto
tothe
the
other
otherpartners.
partners.
Note
Note that
that the
the $200,000
$200,000
results
results from
from the
the net
net assets
assets of
of
the
the partnership
partnership of of $140,000
$140,000 ++
Nia’s
Nia’s $60,000
$60,000 contribution.
contribution. Prepare the journal
entry.
Admission of a New Partner -
-45
Bonus
Bonus Example
Example
Net
Netassets
assetsafter
afterthe
thecontribution
contributionare
are$200,000.
$200,000.
Nia
Niagets
getscredit
creditfor
for20%
20%ofofnet
netassets
assets($200,000
($200,000xx20%).
20%).
The
Theremainder
remainderof ofthe
the$60,000
$60,000contribution
contributionis
isallocated
allocatedto
tothe
the
other
otherpartners.
partners.
Note
Note that
that the
the $200,000
$200,000
results
results from
from the
the net
net assets
assets of
of
the
the partnership
partnership of of $140,000
$140,000 ++
Flatt’s
Flatt’s $60,000
$60,000 contribution.
contribution. Prepare the journal
entry.
Admission of a New Partner -
-46
Using
Using the
the Goodwill
Goodwill Approach,
Approach, prepare
prepare
the
the entry
entry assuming
assuming Nia Nia pays
pays $60,000
$60,000 to
to
the
the partnership
partnership for
for aa 20%
20% partnership
partnership
interest.
interest.
Admission of a New Partner -
-47
Goodwill
Goodwill Example
Example
Net
Netassets
assetsafter
afterthe
thecontribution
contributionare
are$200,000.
$200,000.
Implied
Impliedvalue
valueofofthe
thepartnership
partnershipis
is$300,000.
$300,000.
$60,000
$60,000÷÷20%
20%==$300,000
$300,000
Goodwill
Goodwill to
tobe
berecorded
recordedis
is$100,000
$100,000(300,000
(300,000--
200,000)
200,000)
Prepare
Prepare the
the journal
journal entry
entry
to
to allocate
allocate goodwill
goodwill to
to
Mare,
Mare, Mic
Mic and
and Roma.
Roma.
Admission of a New Partner -
-48
Prepare
Prepare the
the journal
journal entry
entry
to
to admit
admit Nia
Nia to
to the
the
partnership.
partnership.
Admission of a New Partner -
-50
Prepare
Prepare the
the journal
journal entry
entry
to
to admit
admit Flatt
Flatt to
to the
the
partnership.
partnership.
-51
Summary
Possible Criticisms