Partnership Formation

• Partnership is an unincorporated association of two or more individuals to carry on, as co-owners, a business, with the intention of dividing the profits among themselves.
• The total partnership capital remains equal to the fair value of the partner’s net contribution to the partnership.
• Partnership has the characteristics of ease of formation, separate legal personality, mutual agency, co-ownership of property, co-ownership of profits, limited life, transfer of ownership, and unlimited liability.
• Partnership can be formed with less formality as compared to corporations.
• The partnership has a judicial personality separate and distinct from the partners.
• Each partner is a co-owner of the properties invested in the partnership and has an equal right with his partner to possess specific partnership property for partnership purposes.
• A partner has no right to possess a partnership property for any other purpose without the consent of his partners.
• Each partner is entitled to his share in the partnership profit.
• A stipulation which excludes one or more partners from any share in the profits or losses is void.
• The creation of a partnership is basically consensual and may be dissolved by the express will of any partner, termination of a definite term stipulated in the contract, by any event that makes it unlawful to carry out the partnership, or when a specific thing which a partner had promised to contribute to the partnership perishes before the delivery.
• In case of dissolution, the transfer of ownership, whether to a new or existing partner, requires the approval of the remaining partners.
• Each partner, including industrial ones, may be held personally liable for partnership debt after all partnership assets have been exhausted.
• A partnership in which all partners are individually liable is called a general partnership.
• A partnership in which at least one partner is personally liable is called a limited partnership.
• Limited partnership includes at least one general partner who maintains unlimited liability.
• The others, called limited partners, minimize their liability up to the extent of their contributions to the partnership.
• Limited liability partnership usually has “LLP” in its name.
• Advantages of a partnership include ease of formation, shared responsibility of running the business, flexibility in decision making, greater capital compared to sole proprietorship, and relative lack of regulation by the government as compared to corporations.
• Disadvantages of a partnership include easily dissolved/limited life, unlimited liability, conflict among partners, lesser capital compared to a corporation, and a partnership is taxed like a corporation.
• The accounting for assets and liabilities remains the same regardless of the form of business organization.
• The accounting for equity in a partnership involves initial investments, operations, dissolution, and liquidation.
• Formation of a partnership is contractual and can be constituted in any form, such as oral or written.
• The credit to the partners’ capital may vary due to a bonus the corresponding debit to the asset account must still be equal to the fair value of the contribution.
• The difference between the amounts credited and debited is treated as adjustment to the capital accounts of the other partners.
• The sum of the balances in the partner’s individual capital accounts represent the total equity of the partnership.
• Contributions of partners to the partnership are initially measured at fair value.
• A partnership agreement may stipulate certain ratio to be maintained by the partners representing their specific interest in the equity of the partnership.
• Additional investment or withdrawal of investment of a partner.
• Each partner's capital account is credited for the fair value of his net contribution.
• This stipulation may give rise to the adjustments to the initial contributions of the partners.
• Instead, the capital adjustment is accounted for as either:
• An accounting problem exists when a partner's capital account is credited for an amount greater than the fair value of his contributions.
• No contribution shall be valued at an amount greater than its fair value.
• Cash and cash equivalents can measure using face amount.
• Receivable from/Payable to a partner - partnership may enter a loan transaction with a partner.
• Partnerships legal existence begins from the moment the contract is executed, unless otherwise stipulated.
• Cash settlement among the partners.
• In such case, the additional credit to the partners’ capital is accounted for as a deduction from the capital of other partners.
• Temporary withdrawals may be credited to the partner’s drawings account.
• Inventory can be measured using lower of cost and net realizable value.