Partnerships Flashcards
Formation by agreement
the partners must have a voluntary agreement about who contributes assets or services, who performs what functions of the business, and how profits and losses and any additional compensation are shared.
Defined or limited life
the life term of the partnership is established by agreement, partnerships end when a new partner is accepted or a partner leaves
Mutual agency
gives each partner the ability to act as an agent for the partnership in dealing with outside entities such as vendors and lenders.
Unlimited liability
due to mutual agency, any partner has the ability to incur debt for the partnership. Regardless of who negotiated the debt, each partner is liable to pay it if the debt was incurred to further partnership activities
Non-taxable income
the net income of a partnership is not subject to federal taxation at the partnership level, despite the company’s being a separate legal entity from its partners
Co-ownership of property
in a partnership, assets are jointly owned by all partners. If a dissolution occurs, each partner retains a claim on the total assets proportional to that partner’s equity in the organization
Limited capital investment
Unlike a corporation, which is able to raise capital investments by issuing stock, partners do not have the ability to raise capital except by incurring additional debt or agreeing to contribute more of their personal assets.
Participation in both income and loss
The net income or loss of the partnership is distributed as specified in the partnership agreement.
Characteristics of a Partnership (8)
participation in both income and loss, limited capital investments, co-ownership, non taxable income, unlimited liability, mutual agency, limited life, and formation by agreement
Advantages of a partnership (6)
Exempt from taxation, lower cost formation, combined skills and financial resources. flexibility in managing and running business. easy to change business structure, informality.
Disadvantages of a partnership (7)
difficulty of ownership transfer, lack of regulation, individual tax rate, limited life, unlimited liability, mutual agency, limited ability to raise capital.
General partnership
each partner is personally liable to the partnership’s creditors if the partnership has insufficient assets to pay its creditors
Limited partnership (LP)
at least one partner is a general partner but the remaining partners can be limited partners, which means they are liable only for their own investment in the firm if the partnership cannot pay its creditors.
Limited Liability Partnership (LLP)
provides all partners with limited personal liability against another partner’s obligations
Dissolution
when a partner withdraws (due to illness or any other reason), a partner dies, a new partner is admitted, or the business declares bankruptcy
