This is a basic accounting principle for the second form of business, the partnership. Accounting for assets and liabilities in a partnership is basically the same as it is for a sole proprietorship; however, there are few changes in the equity section of the balance sheet. Include at least the following details in the agreement for the business partnership.
Advantages of partnerships
A partnership has three major advantages. This is ease of formation, lack of partnership taxes, and synergy.
It is relatively easy to form a partnership. Partner gets together, decide on the amounts of their investments and their profit sharing, and start the business. The process is much different from the process of forming a corporation, where articles of incorporation, as well as other important documents, must be drawn up.
Unlike the corporation, the partnership, itself pays no taxes on its profits. However, the partnership must file a partnership tax return. This may seem to confuse, but the partnership return is simply an informational return. The partnership is a form of business organization through which profits flow to an individual tax return of the partners. The individual partners pay taxes on their shares of the profits.
In its basic form, synergy means that the total effect of something is greater than the sum of its individual effects.
Disadvantages of partnerships
The partnership form of business organization also has a few disadvantages, including limited life, mutual agency, and unlimited liability.
A partnership is like a sole proprietorship in that the life of the business is contingent on the owners. If a partner were to leave the partner ship, or if a partner died, a whole new partnership would have to be drawn up for the remaining partners or any newly joining the partnership. In other words, the partnership itself has a life limited to the lives of the individual partners.
The term mutual agency refers to the fact that partners are responsible for their partnersâ€™ individual business actions.
Like the owner of a sole proprietorship, partners have unlimited liability with regard to the business. This means that if the business should fail, the businessâ€™s creditors could seize the partnersâ€™ personal assets.
This article is taken from the book â€śhospitality industry financial accountingâ€ť. Raymond S.Schmidgall and James W.Damitio write this book.