Chapter 12 Notes

Chapter 12
Accounting for Partnerships and Limited Liability Companies

There are four major forms of businesses
-Proprietorship
-Partnerships
-Limited Liability Company
-Corporation

For theses types of businesses and all businesses in general the owner should keep personal finances completely separate from business finances. This is so the business will run in a more smooth manner and taxation and profit can be accurately calculated either monthly or annually. As many people say you must not mix business and pleasure. In other words keep you social and personal life completely seperate from your business life.

*Proprietorships- also know as Sole Proprietors are typically small businesses owned and operated by one person. These types of businesses are the most common making up 70% of the market, but on the flip side proprietorships only make up 5% of the total revenue brought in by businesses across the board. And to add to this there are many positive and negative factors to having a proprietorship. The positives include that as the sole owner of the business you can make decisions on how you want to run your business yourself without any interference from other people. Also as the owner you keep all the profits for yourself and do not have to share any of the earnings with other people. However the negatives are, since you are the only owner you have a limited amount of capital to invest in your business and you are responsible for all expenses. You can however borrow money from a family or friend or take a loan from a bank but your resources are still very limited alone to create a large business right off the bat. There are many risks as far as liabilities go as well being the sole owner of a company as well.

*Partnerships- are another route to go when starting up your own business, a partnership is a business owned and managed by two or more people. All the expenses and operation costs are split in  this case between all the members of the partnership, therefore lessening the financial burden of owning a business on your own. However partnerships are sometimes short lived and dissolve easily. This is because if one person decides to leave the partnership whether it is for a number of reasons, the partnership must be terminated and the assets of the business are properly distributed to all members of the business. Also if the other people of the business want to continue to do business they must for a new partnership between them. One positive to having a partnership is more capital to invest in the business. Since there are more people that in turn means more money to put into the creation of your business.

*Limited Liability Company- An LLC is very similar to a partnership but is different in ways that benefit the owners. Instead of the business ending when someone leaves a partnership, LLC allow businesses be members and not be partners. So the business will continue instead of ending like in a traditional partnership.

Dividing Income for Partnerships-
when partnerships merge their businesses and create a partnership there are two different transactions to calculate the salaries of the partners and also the division of the sales. The salaries of the partners should be determined at the beginning of the partnership in the partnership agreement. It is mainly determined based on which person contributed more to the business and who invested more money and assets. Secondly the other division of net income is the division of revenue or sales income. Most traditionaly this money is split 50/50 between the two partners. The major reason that partnerships fail is because of disagreements over money and the failure to come to an agreement over income distribution.

*The partners equally share either a net gain or a net loss depending on the net income for the period. A net gain is achieved by allowances, and expenses being less than the net income, and a net loss is the opposite where allowances and expenses exceed the net income. 

*When new partners join the partnership, there are two possible scenarios which a new partner can be admitted. First a person can buy there way into the busy or pay interest into the business and this makes the person a new partner in the business and gives him rights to a percentage of the profits. This way doesn't directly have an effect on the business itself it is a transaction between solely between the partners of the business. However the other way does have an effect on the business. This way is a person would put money or assets directly into the business itself and therefore having an affect on the business's asset and owners equity accounts. 

*Pretty much the same scenarios occur when withdrawing a partner from the business except the opposite transactions occur to the business'a accounts. So instead of crediting the owners equity and debuting the asset accounts when admitting a partner if someone wants to leave the business you would debit owners equity and credit asset. The money which that partner specifically contributed to the business will be returned to him or a

Her, and if the business doesn't have the assets to give the partner which is leaving the business will set up a liability account to pay off the partner the amount of money which they deserve.