Characteristics, Formation, Chapter 13 Partnerships: Characteristics, Formation, and Accounting for Activities

Characteristics of a Partnership Often governed by the Uniform Partnership Act (UPA) Voluntary association of individuals with a fiduciary relationship Mutual agency - each partner is an agent for other partners and the partnership Legal liability - general or limited partnerships Underlying equity theories - proprietary theory is a major influence C13

Characteristics of a Partner, continued Articles of partnership - a written partnership agreement is advisable Acceptable accounting principles - GAAP or OCBOA Not a taxable entity - a conduit to the individual partners C13

Accounts Used for a Partner’s Capital Investment Drawing account a temporary account periodically closed to capital accounts Capital account a permanent account C13

The Drawing Account Illustrated Debit Periodic withdrawals of partnership assets up to a specified amount Credit Closing of balance to partner’s capital account C13

The Capital Account Illustrated Debit Withdrawals in excess of a specified amount Closing of a net debit balance in the partner’s drawing account Partner’s share of partnership losses Credit Initial and subsequent investments of capital Partner’s share of partnership profits C13

Division of Profits According to a ratio/percentage - assumed to be equal if not otherwise stated, and/or According to capital investments of the partners - important to define how capital is measured and/or According to the labor/service rendered by partners - typically involving a salary and/or bonus C13

Basic Schedule for Allocating Profits

Allocation of Profit Deficiencies and Losses Completely satisfy all provisions of the profit and loss agreement and use the profit and loss ratios to absorb any deficiency or additional loss caused by such action or Satisfy each of the provisions to whatever extent is possible. for example, the allocation of salaries would be satisfied to whatever extent possible before the allocation of interest is begun C13

Basic Schedule for Allocating Deficiencies and Losses

Tax Basis of a Partner’s Interest C13

Tax Basis of a Partner’s Interest, continued

Subsequent Changes in a Partner’s Tax Basis Factors Increasing Basis: Additional contributions of individual assets The partner’s share (based on profit and loss ratios) of increases in partnership liabilities resulting from: assuming partners’ personal liabilities direct liabilities of the partnership The partner’s share of partnership taxable income The partner’s share of separately identified items of income not included in tax income (loss) C13

Subsequent Changes in a Partner’s Tax Basis, continued Factors Decreasing Basis: Distribution of partnership assets The portion of the partner’s additional personal liabilities assumed by the partnership The partner’s share of partnership tax losses The partner’s share of separately identified items of loss not included in taxable income (loss) C13

Alternative Organizational Forms Subchapter S Corporations Limited Liability Corporations Limited Liability Partnerships C13