12_outline - CHAPTER 12 Partnerships Objective 1 Identify...

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CHAPTER 12 Partnerships Objective 1: Identify the characteristics of a partnership A. A partnership is an association of two or more partners who co-own a business usually with the intent to earn a profit. Exhibit 12-1 lists the seven largest accounting partnerships in the U.S. B. The following are characteristics of a partnership: 1. The partnership agreement , or articles of partnership , may be written or oral. A written agreement is preferable, because it clarifies issues such as how profits and losses are to be shared. 2. A partnership’s life is limited to the time the partners continue to own the business. a. Dissolution ends the partnership, although the business may continue under either the same name or a different one. b. Admission or withdrawal of a partner dissolves the old partnership and creates a new one. 3. Mutual agency means that every partner may bind the partnership to contracts. 4. All partners have unlimited personal liability for partnership debts unless the partnership is a limited partnership. A limited partnership has one or more general partners who assume the general liability and the other partners are limited partners who only have limited liability, thus avoiding unlimited personal liability for partnership obligations. 5. All property contributed to, or purchased by, the partnership, is co-owned by all the partners. 6. The partnership itself does not pay income tax . Instead, each partner pays personal income tax on partnership income. 12-1
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7. Accounting for a partnership is similar to accounting for a proprietorship. Each partner has an individual capital and withdrawal account. 8. Exhibit 12-2 lists the advantages and disadvantages of the partnership. C. There are two basic types of partnerships. 1. The general partnership— each partner is an owner and has unlimited liability. Partnership income (loss) passes through to each partner, who then pays personal income tax based on his percentage share of the partnership income. 2. The limited partnership has at least one general partner who has unlimited liability and limited partners who have limited liability. 3. Many partnerships, such as accounting firms, organize as limited liability partnerships (LLP) where every partner has limited liability, but the LLP must maintain sufficient insurance to cover any liability. 4.
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12_outline - CHAPTER 12 Partnerships Objective 1 Identify...

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