Key Terms
Formation by agreement
Voluntary association. Partners must agree on contributions, roles, and how profits and losses are shared.
Defined/limited life
Ends when a partner is added or leaves, or when the business dissolves. Unlike corporations, no unlimited life.
Mutual agency
Every partner can legally bind the partnership.
Unlimited liability
General partners personally liable for all business debts, including personal assets.
Non-taxable at partnership level
The partnership itself pays no federal income tax. Income or loss flows through to partners via Form K-1; partners pay t
Co-ownership of property
All assets are jointly owned. On dissolution, each partner claims assets proportional to their equity.
Limited capital investment
Can't issue stock. Must incur debt or contribute personal assets to raise capital.
Same logic applies to liabilities
Assumed liabilities are recorded at current value.
Example
75:25, or 3/4 and 1/4. Simplest approach.
NOTE
These salaries are expenses of the partnership, deducted before the remainder is distributed.
Net income
$68,000 Salary: Partner A gets $15,000; Partner B gets $10,000 Remaining after salaries: $68,000 - $25,000 = $43,000 Spl
Partner A total
$15,000 + (-$28,500) = -$13,500 Partner B total: $10,000 + (-$28,500) = -$18,500
Net loss
$32,000 Same salaries apply ($15,000 and $10,000 = $25,000 total) Remainder after salaries: -$32,000 - $25,000 = -$57,00
Steps
1. Determine total capital after investment.
PAYOUT MORE THAN CAPITAL BALANCE
Bonus to withdrawing partner. Excess is deducted from remaining partners' capital accounts per income ratio.