Chapter 4 Forms ofOrganization(5)

partners. Typically, while the general partners manage the LLLP, the limited partners' interest is purely financial.

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LLLP versus LP[edit]

The difference between an LLLP and a traditional limited partnership lies in the general partner's liability for the debts and obligations of the limited partnership.

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In a traditional limited partnership the general partners are jointly and severally liable for its debts and obligations; limited partners are not liable for those debts and obligations beyond the amount of their capital contributions.

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In an LLLP, by having the limited partnership make an election under state law, the general partners are afforded limited liability for the debts and obligations of the limited partnership that arise during the period that the LLLP election is in place. Certain LLLP elections take the form of a limited partnership electing to be a limited liability partnership (this is the format used in Delaware, for example) while in other states the election is made in the certificate of limited partnership (examples

being Florida, Hawaii and Kentucky). Most states require that an LLLP identify itself in its name, but those requirements are not universal.

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Characteristicsof partnership

Partnerships have the following common characteristics: 1) A partnership firm is not a legal entity 2) Partnership is a concurrent subject 3) Unlimited Liability

The major disadvantage of partnership is the unlimited liability of partners for the debts and liabilities of the firm. Any partner can bind the firm and the firm is liable for all liabilities incurred by any firm on behalf of the firm. If property of

partnership firm is insufficient to meet liabilities, personal property of any partner can be attached to pay the debts of the firm. 4) Partners are Mutual Agents.

The business of firm can be carried on by all or any of them for all. Any partner has authority to bind the firm. Act of any one partner is binding on all the partners. Thus, each partner is ?agent? of all the remaining partners. Hence, partners are ?mutual agents?.

5) Oral or Written Agreements. Partnership Agreement is to be in written or oral format. Thus the general rule of the Contract Act applies that the contract can be in be 'oral' or 'written' as long as it satisfies the basic conditions of being a

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contract i.e. the agreement between partners is legally enforceable. A written agreement is advisable to establish existence of partnership and to prove rights and liabilities of each partner, as it is difficult to prove an oral agreement. 6) Number of Partners is minimum 2 7) Mutual agency is the real test.

Accounting practices in partnerships

1．Opening the accounts of a new partnership

Dr. cash\\accounts receivable\\inventory\\plant assets Cr. Name of partner, capital Name of partner, capital

2. Additional investment Dr. cash

Cr. Name of partner, capital

3. Sharing agreement ? A fixed ratio

? Interest allowances to partners, with remainder in a fixed ratio ? Salary allowances to partners, with remainder in a fixed ratio

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? Both

the formula of dividing partnership profits and losses

the relative investments of the partners—the beginning or average capital ratio for the year;

the services performed by the partners—a salary allowance both—a salary allowance and interest allowance

4. Closing the accounts of a partnership at year-end ? Dr. income summary

? Cr. Name 1 of partner, capital ? Name 2 of partner, capital ? Dr. Name of partner, capital

? Cr. Name of partner, withdrawal ?

5. Withdrawal cash from partnership o Dr. Partner’s name, withdrawal Cr. Cash

6. Financial statements of a partnership

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? Statement of partners’ capital o Beginning balance o Additional contribution o Distributed Net income o Less: withdrawals o Ending balance

Assume that the Ames and Baker partnership had a profit $ l8,000 for the year and that the partners, relative capital balances before any profit distribution at the end of the year were as follows:

Ames, Capital Baker, Capital 2013 2013

Jan.1 30000 Jan.1 10000 July1 10000

Ames and Baker have the following sharing agreement: salaries of $ 6,000 to Ames and $ 4,000 to Baker; 8% interest on average capital balances; and the remainder of net income to be divided equally. The net income $ 18,000 would therefore be divided as follows. Ames &Baker

Earnings to be divided 18，000 25