16_Fischer10e_SM_Ch13_final - CHAPTER 13 UNDERSTANDING THE...

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CHAPTER 13 UNDERSTANDING THE ISSUES 1. Partnerships are generally less formal than oth- er types of organizations and yet it is important to consider a number of factors in a partnership agreement. Individual partners have more legal exposure in a partnership because, unlike a corporation, partnerships are characterized by unlimited liability. However, limited partners, limited liability corporations, and limited liability partnerships provide for a significant reduction in such liability. Partnerships offer significant tax advantages over a corpora- tion in that they are not taxed as a separate entity and, therefore, avoid double taxation issues. However, other types of tax option or- ganizations are also available that avoid double taxation. 2. The use of a salary or bonus as a means of al- locating profits would be appropriate when there is a desire to reward partners for personal services or significant personal time commit- ments to the partnership. The use of interest on capital as a means of allocating profits would be appropriate when the business is capital in- tensive versus labor intensive or if the partners are not significantly involved in the day-to-day operations. 3. Unless the profit-sharing agreement states oth- erwise, all provisions of the agreement should be satisfied except the final allocation of any remaining profits. Rather than finally allocating any remaining profits, the profit/loss percent- ages would be used to allocate the resulting deficiency. In contemplation of such a condi- tion, it is possible that a profit-sharing agree- ment would call for satisfying each provision, in order of priority, to whatever extent possible. In the case of a loss, the only provision that could be satisfied would be that which allocates the loss between the partners per their profit/loss percentages. 4. Generally speaking, a partner’s capital account would be debited for the following: their share of any partnership losses, the closing of the drawing account to capital, and any withdraw- als whose amount is deemed to be excessive per the partnership agreement and therefore to be considered as a direct reduction of capital. 85
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Ch. 13—Exercises EXERCISES EXERCISE 13-1 1. Investors in a partnership are not issued stock and have a capital balance rather than a capital stock at par value account. Regarding the question of legal liability, a partnership is character- ized by unlimited liability in that claims against the partnership can proceed against individual partners’ net assets if necessary. Therefore, unlike in the case of a corporation, there is no level of minimum liability. It is possible, however, to structure a partnership as a limited partnership in which case a limited partner’s liability may not extend to their personal net assets.
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This note was uploaded on 02/05/2010 for the course ACC 476 taught by Professor Hildy during the Spring '07 term at Lane.

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16_Fischer10e_SM_Ch13_final - CHAPTER 13 UNDERSTANDING THE...

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