Topic 16: Partnerships

Question 1

What are some reasons why a partner may decide to provide a loan to the partnership rather than investing more capital?

Answer 1

• why a partner may decide to provide a loan to the partnership rather than investing more capital

*The exchange of funds does not affect the lax status of the business. The business will have extra capital because of the loan but that capital isn’t taxed as income because it has been transferred from an owners personal account to the shared business account rather than earned by the business through operating activities. Although the business has extra money, it hasn’t earned that money so the additional cash isn’t subject to tax.

• A partner may decide to provide a loan to the partnership as a loan is repayable will provide a guaranteed annual income.

Question 2

Why would Business people want to Join a Partnership Vs a Sole Traders business?

Answer 2

• The Firm can grow/expand since more Partners can provide more capital
• More partners can provide different skills and expertise that can be used to improve the business
• Management/responsibility can be shared.
• Partnerships are usually family businesses (brothers). where the dependable environment brings a stronger desire to succeed.
  *ideal organisations for professional practices (doctors, lawyers, accountants)

Question 3

What are the dissadvantages of partnerships?

Answer 3

• The ordinary partners have unlimited liability and are responsible for the firm’s debts, even if they have to lose their personal belongings.
• Profits are shared, therefore each partner received only a fraction of the firm’s profits. * Disagreements between partners may cause decisions to delay.
• Partnerships may have difficulty in raising sufficient capital for large-scale operations. Unlimited liability is a deterrent to business expansion.
• Transfer of partnerships or liquidation is difficult.
• Death of a partner will dissolve the business.

Question 4

How to change the business structure from SOLE TRADER to PARTNERSHIP?8

Answer 4

We need to do the following:
1. A partnership agreement that includes how profits will be shared and what interest will be allowed on capital and charged on drawings. If there is no agreement, they have to follow the Partnership Act 1890.

2. Separate capital accounts for each partner that will show the initial investment of each partner and any further investments.
3. Separate current accounts for each partner to show current transactions between the firm and the partners (drawings, interest on drawings, interest on capital, salaries, share of profits).
4. An Appropriation section in the Income Statement to show the profits shared between the partners.
5. The Statement of Financial Position to show the balances of the Partner’s Capital and Current accounts.