Study: What are partnerships and what are some of its advantages and disadvantages?
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Slide 1 (:12s)
Links to an external site.
Partnerships
Welcome to Introduction to Accounting for a User's Perspective. What are the common forms of ownership structure in the United States and what are some advantages and disadvantages of each? Partnerships.
Slide 2 (:16s)
Links to an external site. The following discussion will focus on the key characteristics and the advantages and disadvantages of partnerships. You should use the Summary of Business Structures table to guide you as you learn more about partnerships.
Slide 3 (:40s)
Links to an external site. Shared decision-making authority: Partnerships
Links to an external site. have two or more owners (i.e. partners) that share decision-making authority. A single partner has the legal ability to enter contracts and sign agreements that obligate all the partners in a partnership. This shared decision-making, legal authority can be a disadvantage to the other partners if a given partner enters into contracts they do not approve of. In addition, once a sole proprietor
Links to an external site. chooses to join a partnership s/he loses sole decision authority for the partnership because other partners will be making decisions as well.
Slide 4 (:41s(
Links to an external site. Easy set-up: Partnerships, like sole proprietorships, can be set up quite easily and require no significant bureaucratic forms or paperwork (i.e. commonly referred to as “red-tape”). In fact partnerships simply need two or more individuals who choose to become partners in a business endeavor, and they can become a partnership. For example, if two teenagers, decide to become part owners of a babysitting business with both contributing resources and/or time and both sharing in the profits, their partnership would be formed. Partnerships can have as few as two partners or as many as several thousand partners and are often used by professionals.
Slides 5-7 (1m:12s)
Links to an external site. Minimal regulations: As with sole proprietorships, states do require partnerships to obtain state sales tax or state excise tax licenses.
In Hawaii the form used for partnerships is the same for sole proprietorships. As with sole proprietorships, partnerships have no significant regulatory financial reporting requirements unless they hire employees.
Although not required by law, potential partners would be wise to create a partnership agreement in which partners agree to the name and nature of the business, their day-to-day operational commitment, what capital Links to an external site. they will contribute, how profits and losses will be shared, how and when the partnership will terminate and how disputes will be resolved. Partnership agreements, especially between lifelong friends, are very important because once two or more people enter into a partnership; they are legally bound to each other until the partnership is dissolved. More complete lists of what should be included on partnership agreements are provided on the Internet. Here is one example, also known as the article of copartnership, from About.com that you can click on here Links to an external site..
Slide 8 (:18s)
Links to an external site.In addition, they have no legal requirement to submit their financial statements to any external parties, including the SEC
Links to an external site., except to comply with tax reporting laws, or to comply with contractual agreements.
Slide 9 (1m:06s)
Links to an external site. Single taxation: You should have already watched the sole proprietorship video which will help you see that partnerships are single-taxed in a similar manner to sole proprietorships, so some of this should be a review. All of a partnership’s net income is attributed to the individual partners every year based on the partnership agreement and this attributed net income is what the partners will be taxed on in their individual tax returns. This attribution of income does not mean that the partnership made a capital distribution to the partners, no money was withdrawn. It just means that the partners will receive a tax document indicating the amount of income attributed to them from the partnership so that they can report it, and pay taxes on it, in their personal tax return. Therefore, the income of partnerships is subject to single taxation just like sole proprietorships. Single taxation is an advantage of partnerships.
Slide 10 (:37s)
Links to an external site. Now, when a partner actually needs funds out of the partnership to be used for personal reasons, such as to buy a boat, the partnership can make a make a capital distribution to him/her which is similar to the payment of a dividend
Links to an external site. by a corporation BUT, unlike dividends from corporations, capital distributions to partners are not taxable. Capital distributions reduce the partnership’s total assets and will reduce the specific partner’s equity
Links to an external site. claims against the partnership.
Slides 11-13 (1m:05s)
Links to an external site. High access to expertise: Professionals such as accountants, attorneys, and doctors tend to operate as partnerships. Small shops and service businesses also tend to set up as partnerships.
For example, Hewlett-Packard began as a partnership in a garage with an initial capital investment of US $538
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Depending on the size of the partnership and the number of partners in it, the individual partners may or may not be heavily involved in the day-to-day operational decisions and the accounting for the business. Large partnerships often have a managing partner, or a team of partners, who focuses on the operational side of running the partnership thus freeing up the other partners to focus on revenue generation and client service. Partners vote on significant partnership-wide decisions or on changes to the partnership agreement. Because no limit exists on the number of partners in a partnership, partnerships have the advantage of having greater access to expertise than sole proprietorships have.
Slide 14 (:22s)
Links to an external site. Limited access to capital: Partnerships have an advantage over sole proprietorships in that they have more partners to access capital from. This access is not as great as what is available to corporations, as we will learn later, but it has the potential of being significantly more than that of sole proprietorships.
Slide 15 (:53s)
Links to an external site. Unlimited legal liability: The partners in a partnership have the same level of legal liability for the partnership's unpaid debts as a sole proprietor does for the debts of a sole proprietorship. What makes a partnership especially risky from a legal standpoint is that any single partner could potentially enter into an agreement, or create a significant liability to obligate the other partners. This is called mutual agency, it effectively means that each partner can fully act as an agent on behalf of the partnership. Key point: Partnerships are NOT legally separate entities from the partners personal resources and therefore any debts of the partnership are actually debts of the partners resulting in the same risk to personal assets
Links to an external site. that sole proprietors experience.
Slide 16 (:27s)
Links to an external site.Potentially unlimited life: Although partnerships theoretically have a limited life which could end upon the death of, termination by, or withdrawal of a partner, it is not uncommon for partnerships to last much longer than any one of the original founding partners because as one partner leaves, voluntarily or otherwise, new partners can be admitted in their place.
Slides 17 & 18 (:29s)
Links to an external site. Difficult transfer of ownership: As with sole proprietorships, someone can not simply take over the partnership, but rather they can purchase the assets and liabilities
Links to an external site. of the partnership, or they can become a new partner of the partnership when the other partners agree to it, which agreement is not always easy to receive. We will discuss Limited Liability Partnerships
Links to an external site. (LLPs) and Limited Liability Companies
Links to an external site. (LLCs) in a later topic.