Accounting for partnerships – Discuss the advantages and disadvantages of partnerships. Identify and discuss the Financial Accounting Standards (FAS) that govern accounting for partnerships including both creation, operation, and liquidation. What are the tax consequences of partnerships.
The legal definition of a partnership is pretty simple. It is an association of two or more persons who have not incorporated; and carry on a business for profit as co-owners. A partnership exists if these conditions are met, even though the people involved may not know it or even intend that the business be a partnership--and even if they don't actually make a profit. Partnerships can be flexible; the partners …show more content…
In terms of the business's stability, adding or subtracting limited partners is not potentially as disruptive as the retirement, death, or disability of a general partner. In terms of paperwork, there's more if you set up a limited partnership. Professionals, such as accountants, lawyers, and architects, frequently use limited liability partnerships. The advantage of these partnerships is that each partner is not personally liable for the malpractice of other partners. However, they may be personally responsible for the debts and obligations of the business, so their liability is less limited than it would be in a corporation or a limited liability company.
Since the partnership is a “pass through” entity, there is no potential for income tax on it. Unlike corporations and irrevocable trusts, a partnership is not a taxpaying entity. A partnership files an annual informational tax return setting forth its income and expenses, but it doesn’t pay tax on its net income. Instead, each partner’s proportionate share of income or loss is passed through from the partnership to the individual. Each