Chapter 11 - Chapter 11 PartnershipsandLimited...

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Chapter 11 Partnerships and Limited  Liability Entities Partnership Definition An association of two or more persons to carry on a trade or business o Contribute money, property, labor o Expect to share in profit and losses For tax purposes, includes: o Syndicate o Group o Pool o Joint venture, etc Entities Taxed as Partnerships General partnership o Consists of at least 2 partners o Partners are jointly and severally liable Creditors can collect from both partnership and partners’ personal assets General partner’s assets are at risk for malpractice of other partners even though not personally involved Limited liability partnership (LLP) o An LLP partner is not personally liable for malpractice committed by other partners o Popular organizational form for large accounting firms Limited partnership o Has at least one general partner One or more limited partners o Only general partner(s) are personally liable to creditors Limited partners’ loss is limited to equity investment Limited liability company (LLC) o Combines the corporate benefit of limited liability with benefits of partnership taxation Unlike corporations, income is subject to tax only once Special allocations of income, losses, and cash flow are available o Owners are “members,” not partners, but if properly structured will receive partnership tax treatment Partnership Taxation Partnership is not a taxable entity o Flow through entity Income taxed to owners, not entity
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Partners report their share of partnership income or loss on their own tax return Generally, the calculation of partnership income is a 2-step approach o Step 1: Net ordinary income and expenses related to the trade or business of the partnership o Step 2: Segregate and report separately some partnership items If an item of income, expense, gain or loss might affect any 2 partners’ tax liabilities differently, it is separately stated e.g., Charitable contributions Partnership Reporting Partnership files Form 1065 o Includes Schedule K which accumulates the information to be reported to partners Provides ordinary income and separately stated items in total o Each partner (and the IRS) receives a Schedule K-1 Reports each partner’s share of income, expense, gain, and loss Partner’s Ownership Interest Each owner normally has a: o Capital interest Measured by capital sharing ratio Partner’s percentage ownership of capital o Profits (loss) interest Partner’s % allocation of partnership ordinary income (loss) and separately stated items Certain items may be “specially allocated” o Specified in the partnership agreement Basis Issues Each partner has a basis in their partnership interest o Partner’s basis is adjusted for income and losses that flow through This ensures that partnership income is only taxed once Partner’s basis is important for determining: o Deductibility of partnership losses
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Chapter 11 - Chapter 11 PartnershipsandLimited...

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