Partnership Basics

Basics A partnership is an unincorporated business form formed by two or more people. The partners are co-owners. Often the preferred form for CPA’s, attorneys, architects, physicians, etc.

Characteristics Voluntary association of two or more persons. Share risks and rewards. Have to agree to make decisions. Courts have ruled partnerships can be created by the actions of persons working in partnership even when no formal agreement is present Often formed with a partnership agreement in writing but can be binding if only expressed orally. Agreement usually details Names and contributions Rights and duties How to share income and losses – In the absence of an agreement, partners share income and losses equally. Withdrawal arrangements Dispute procedures Rules for admission and withdrawal of partners (To admit a new partner, all current partners have to agree). Rights and duties should a partner die

Characteristics Limited life – Partnerships are often dissolved due to death, incapacity, bankruptcy, and can be terminated at will. Taxation - The partnership is not taxed as an entity but each partner receives an allocation of income or loss (Form K-1) which is reported on the returns of the individual partners. Mutual agency - Any partner can bind the partnership to an agreement or contract as long as it is within the scope of the partnership business. Unlimited liability – Each partner is responsible for the partnership debts and if the partnership does not have enough assets, creditors can apply their claims against the personal assets of each partner. Co-owners – Partners are co-owners of the partnership property. Different forms – Limited Partnerships, Limited Liability Partnerships, S Corporations and Limited Liability Companies are all forms a partnership can take depending upon how the partners wish to align.

Basic Accounting Initial investment – Can invest money, property and liabilities associated with the investment of cash or property. A capital and withdrawal account is maintained for each partner just like the capital and withdrawal account for a sole proprietor. Income and losses are allocated based on the agreement or in the absence of an agreement are shared equally. Income and loss allocations can be done on the basis of (1) stated ratios (2) capital balances and (3) services performed, interest earned on capital balances and ratios.