ACTG 2110 Chapter 12 – Accounting for Partnerships and Limited Liability Companies

Characteristics Proprietorship Parthership –Written agreement This is a must. Should state at a minimum how profit AND losses will be shared. Should have this agreement even if you are starting a partnership with a trusted friend!!!! –Limited life Partnership dissolves when a new partner enters or an old partner leaves

Characteristics Partnership (continued) –Mutual Agency All partners are bound by the business decisions of any partner –Unlimited Personal Liability All partners personal assets can be used by the partnership to settle the business debts –Co-ownership of Partnership Assets All partners own the partnership assets, no matter who contributed them

Characteristics Partnerships (continued) –Participation in income –Individuals are taxed for business profits, not the partnership business. –Ease of Formation It is very easy to start a partnership Little or no regulations –Partner’s Equity Accounts Each partner has a capital account Each partner has a withdrawal account

Characteristics Limited Liability Companies (LLCs) –Limited liability –Mutual agency may be limited –Can have continuous life even if “members” change –Can still be a nontaxable entity –Must file articles of incorporation with state government (like corporations)

Formation of a Partnership Valuation of Assets Contributed by Partners –The fair market value of assets contributed to the business is placed on the books, not the book value –Each partner’s capital account is credited for each one’s contribution.

Accounting for Partnership Profits and Losses Factors to consider –Investment –Time spent in business –Expertise Common methods of division –Stated fraction –By investment –By service to organization –Any combination of the above factors

Accounting for Partnership Profits and Losses If the written partnership agreement is silent on profit and losses (or there is no agreement), profits and losses are shared equally

Accounting for Changing Partnerships Admitting a New Partner –Outside Purchase (off the books-just change capital account names) –Investing Directly into the Partnership Withdrawal of a Partner –Selling an interest to an outsider (off the books-just change capital account names) –Selling an interest to the other partners Liquidation of the Partnership

Additional Topics Statement of partners’ capital –Lists each partner’s beginning balance + investments + profit share – loss share – withdrawals Financial Analysis and Interpretation –Revenue per employee = Total Revenue – Total number of employees –Allows for comparison across firms and years