Partnerships

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.

Ø      The name of the partners

Ø      The amount of the investments of each individual partner

Ø      The profit-sharing arrangements

Ø      The buy/sell agreement of the partnership

Advantages of partnerships

A partnership has three major advantages. These are ease of formation, lack of partnership taxes, and synergy.

Ease of formation

It is relatively easy to form a partnership. Partner get 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.

No partnership taxes

Unlike the corporation, the partnership itself pays no taxes on its profits. However, the partnership must file a partnership tax return. This may seem confusing, but the partnership return is simply an informational return. The partnership is a form of business organization through which profits flow to the individual tax returns of the partners. The individual partners pay taxes on their shares of the profits.

Synergy

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.

Limited life

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 new partners joining the partnership. In other words, the partnership itself has a life limited to the lives of the individual partners.

Mutual agency

The term mutual agency refers to the fact that partners are responsible for their partners’ individual business actions.

Unlimited liability

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 business’s creditors could seize the partners’ personal assets.

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