Discuss the Advantages and Disadvantages of Partnerships

Topics: Corporation, Types of business entity, Partnership Pages: 5 (1945 words) Published: August 27, 2012
Accounting for partnerships

Accounting for partnerships – Discuss the advantages and disadvantages of partnerships.  Identify and discuss the Financial Accounting Standards (FAS) that govern accounting for partnerships including both creation, operation, and liquidation.  What are the tax consequences of partnerships.  The legal definition of a partnership is pretty simple. It is an association of two or more persons who have not incorporated; and carry on a business for profit as co-owners. A partnership exists if these conditions are met, even though the people involved may not know it or even intend that the business be a partnership--and even if they don't actually make a profit. Partnerships can be flexible; the partners have the ability to make virtually any arrangements defining their relationship to each other that they desire. The partners can agree to split the ownership and profits in flexible ways, and losses can be allocated on a different basis from profits. Because you can sell equity interests (ownership) in a partnership, it's easier to raise capital in a partnership than in a sole proprietorship. (However, since investors are more familiar with the corporate form, a corporation may have a greater ability to raise capital than a partnership.) With careful advance planning, a partnership can avoid some of the problems inherent in a proprietorship when an owner dies, retires, or becomes disabled. When you operate as a partnership, you have someone to share the workload. When operating as a partnership you do not have to treat the business as a separate entity for tax purposes --- each partner can simply file his own taxes for his share of the business. The major downside of organizing as a partnership is that both partners still have personal responsibility for debts and liabilities, as is the case with a sole proprietorship. Also, you cannot make certain important business decisions without the agreement of the partner. Generally, the three major forms of business entities are sole proprietorships, corporations and partnerships. There are several other hybrid organizations such as limited liability companies, limited partnerships and S Corporations. Each business entity has advantages and disadvantages. When choosing which entity you want to conduct business as, you should look closely at the advantages and disadvantages to balance which entity type works closely with your goals. The major disadvantage is that in both limited and general partnerships, general partners have unlimited liability. This means that to protect their personal assets they have to take some additional (and maybe costly) steps. For example, a general partner doesn't have to be a person. Often, the general partner is a corporation or a limited liability company, and this form of business then provides liability protection for the owners. In this way, the threat to a general partner's assets often can be minimized or eliminated. Another important disadvantage is that a partnership is not as stable as a corporation. A general partnership and a limited partnership dissolve in many cases automatically when a general partner dies, files for bankruptcy, retires, resigns, or otherwise ceases to be a partner. The partnership will shut down unless either a remaining general partner continues the business or all the partners (or in some states, a majority) agree to continue it. However, a corporation, under most statutes, continues forever or until some specific action is taken to dissolve it. It may be more difficult in a partnership than in a corporation to have a hierarchy of management and to raise capital from outside sources. But creative agreements can provide for specific management arrangements and variations in capital ownership in the partnership. Partnerships are taxed on a conduit, or flow-through, basis. This means that the partnership itself does not pay any taxes. Instead, the income and various deductions and tax...
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