Lecture 8 - Partnerships

Question 1

what is a partnership?

Answer 1

a legal arrangement that allows two or more people to share responsibility for a business

partners share ownership and profits - but they also share losses and responsibility

Question 2

limited partnerships characteristics?

Answer 2

formed under limited partnerships act 1907

• liability is not limited to the capital contributed
• not allowed to take out capital contributions during the partnership’s lifetime
• not allowed to take part in management of the company
• must be at least one general partner

Question 3

what do limited liability partnerships differ from?

Answer 3

• traditional business partnerships
• limited company structure

Question 4

characteristics of limited liability companies?

Answer 4

• all partners permitted to manage the business
• partners liable only to the extent of their capital invested
• LLP is a separate legal entity from its members
• no restriction on number of partners allowed

Question 5

capital contributions?

Answer 5

partners may not contribute equal amounts of capital

they can add additional capital following their investment

Question 6

profit / loss sharing ratios?

Answer 6

partners can agree to contribute to share profits/losses to any ratio they wish

Question 7

do partners receive interest on capital?

Answer 7

yes

can be done when capital contributed is unequal, but work done is equal

treated as a reduction to the calculation of profits

Question 8

do partners pay interest on drawings?

Answer 8

yes

this is to deter partners from taking cash out unnecessarily

Question 9

how are partnership salaries treated?

Answer 9

deducted from net profit before distributing profit between partners

Question 10

when a partnership agreement doesn’t exist…

Answer 10

• profits / losses are shared equally
• no interest on capital
• no interest charged on drawings
• salaries not allowed
• 5% interest on ADDITIONAL capital deployed

Question 11

purchased goodwill?

Answer 11

total price less value of net identifiable assets

Question 12

goodwill is an ….

Answer 12

intangible asset

Question 13

when can goodwill exist?

Answer 13

only if the business was purchased for an amount in excess of the net assets

Question 14

goodwill is traditionally seen as…

Answer 14

the value of the business’ reputation at the time of its purchase

Question 15

who owns goodwill in a partnership?

Answer 15

goodwill is shared amongst partners in the same ratio they share profits