Question

1. What is the purpose and possible components of a partnership agreement? 2. How does mutual agency affect a partnership? 3. How is net income of a partnership taxed? 4. What is the difference between an LLC and an LLP? (Hint: An LLC and and LLP are not a limited partnership. All three are separate forms of organization.) 5. How are partnership profits allocated? 6. What is the difference between partnership liquidation and partnership dissolution? (Hint: do not report that they are the same.)

Answer 1

1. The purpose of Partnership Agreement (or partnership contract) is to establish a business enterprise through a legally binding contract between two or more individuals or other legal entities. This Partnership Agreement designates the rights and responsibilities of each partner or entity involved.

2. Mutual agency is the legal relationship between partners in a partnership where each partner has authorisation powers and the ability to enter the partnership into business contracts. In leman's terms, it is the authority given to a person doing business on behalf of the company, usually a business owner or partner. Each partner is responsible for one another in a basic sense however, each acts as individuals in the business operations and has such authority.

3. A Partnership is not subject to federal income tax. Rather, its owners are subject to Federal income tax on their share of the profit. Fom 1065 is used to calculate a partnership's profit or loss. Schedule K is ued to break down a partnership's income and deductions by category. Schedule K-1 is then used to show each partner's allocated share of the various types of income and deductions. Income and deductions from a partnership maintain their original classification when they are passed through to a partner.

4. An LLC is a limited liability company, sometimes referred to as a limited liability corporation, and an LLP is a limited liability partnership. Both legal entities are relatively new in the business world, and both share aspects of a corporation and a partnership. LLPs are taxed as partnerships where the profits and losses from the business must be reported on the partners' personal income taxes. LLCs can have only one member, whereas an LLP mush have at least two partners. A sinlge member LLC may be taxed as a sole proprietorship or a Corporation.

5. The partnership profits are allocated and taxed based on a stated ratio for each partner, sharing based on each partner's capital balance, sharing based on partner's service, and a sharing based on a combination of stated ratios, capital balance, and services. If the partner has no partnership agreement to specify how to divide profits or losses, then they are shared equally. If the partnership agreement specifies a method for sharing profits, but not losses, then losses will be shared the same way as profits.

6. In a general partnership, when a partner decides to leave, the partnership is dissolved. Dissolving a partnership requires partners to equally split the debts and assets of the partnership. Whereas in case of liquidation, the process is sell non cash assets for cash; allocate any gain or loss on the sale of non cash assets to each partner using the income ratio; pay any liabilities of the ownership and distribute the remaining cash to the partners using the capital ratio.