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Nature of Partnerships When starting a business, it can be with a sole proprietorship, a partnership, or as a company. A partnership is the most popular and the easiest to form. Partnerships combine individual talents and skills together for a hopefully successful business enterprise venture. Man has realized that it is easier to do something with the help of others than singly. Partners, also, provide a greater chance of obtaining equity capital for their business venture, while sharing the risks that go along with a rapidly growing business.
There are basically three types of partnerships: the general artnership, the limited partnership, and the limited liability partnership. This paper discusses the general partnership. The definition of a partnership is “the association of two or more persons to carry on as co-owners of a business for profit . ” Partnerships may be formed as a formal agreement or informally with a handshake. Either way, a partnership agreement should be written up with all the aspects of the partnership covered.
Once the partnership agreement is filled out and agreed on by all partners, each partner will need to sign stating they are in agreement. A artnership agreement helps to alleviate any conflicts that may arise at any future date. When accounting for a partnership, it will depend on the accounting method stated in the partnership agreement. If any noncash assets were contributed, these will need to be assigned a fair value. Any noncash assets brought to the partnership are the property of the partnership . Each partner investing capital will have to be agreed upon by all partners.
This investment will determine the ratio or percentage of net profit or loss to be divided between each partner. If there is no ratio or ercentage stated in the partnership agreement, then everything is divided equally. When setting up the accounting for the business, most accounting methods have multiple accounts for each partner. These accounts are the capital account, which shows the initial investment of each partner, the drawing account, showing any withdrawals taken over a years’ time, and the loan account, where partners can take a loan from the business.
The capital account can be maintained in two different ways: the fluctuating capital method or the fixed capital method . The division of net profit equally. To account for this division, say S, T, and U decided to set up a partnership. S contributes $40,000, T contributes $30,000, and U contributes $30,000. This would be a ratio of 4:3:3. The total contributed to the partnership is $100,000. Profit for the first year is $300,000. Because the ratio is 4:3:3, S’s net capital would be $120,000. T and Us net capital would be $90,000 each, for a total of $300,000.
If the partnership decides to add a partner, whatever was determined in the partnership agreement will determine what steps to take for adding this new partner. Adding a new partner normally adds profitability. If the partners decide to cease operations, there are two alternatives to help them decide which approach is better for the business: liquidation or dissolution. “Liquidation refers to the complete sale of the business’ assets and dissolution refers to the closure of a business, often on voluntary terms of the business owner. Liquidation means that the business is closing its doors and liquidating all noncash assets and liabilities. Dissolution may mean that the partnership is dissolving and a new partnership, another partnership or business is buying out the business, or the business is dissolving. When considering dissolution, there are two types, a technical dissolution and a general dissolution . A technical dissolution is when there is a change in the composition of the business. A general dissolution is a complete dissolution or winding up of the partnership and the business.
The dissolution may result with a mutual agreement of all partners, a partner being served notice, a court order, fraud, misrepresentation, or illegal activity, or where the business is not making a profit. Whether liquidating or winding up a business, transactions to process are the collection of receivables, conversion of oncash assets to cash, payments to creditors, liabilities closed out, and the remaining distribution of net balance to the partners, in cash . When starting a business with a partnership, it is with the intent purpose of longevity.