AFM121 Chapter Notes - Chapter 11: Legal Personality, Limited Partnership, Corporate Tax

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OC2146671

2 Apr 2018

School

University of Waterloo

Department

Accounting & Financial Management

Course

AFM121

Professor

John D' Amato

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Document Summary

Basic forms of business ownership: proprietorship, proprietor is the owner and operator of the business, not a separate legal entity, owner has complete control and claim to profits, unlimited liability. Owner is personally responsible for all debts, losses, and obligations from business activity: capital generation restrictions, partnership. At least one partner responsible for day-to-day operations. At least one partner responsible for business debt and obligations. General partnership unlimited liability and usually joint and several liability. partners are jointly responsible for all obligations i. each partner is in turn responsible for all obligations on their own. Limited partnership at least one general partner responsible for running the business and faces unlimited liability. partner can not be involved with daily business activity i. liability is limited to the partner"s investment: corporations. Dominant form measured by dollar volumes of sales. possible tax benefits i. possible double taxation: corporate profits and dividend income. Owners face limited liability and can sue the corporation.

Related Questions

Title: Business Structure, Liability, and Partnership Agreement

Develop a hypothetical business you would consider starting with a friend or relative.

Imagine that the friend or relative has sufficient funds to start the business and that you will be doing most of the work (for example, if you were starting a mobile car wash business, you would be procuring the customers and washing the cars).

Imagine also that you will be performing all the bookkeeping functions for the business.

In a written report, prepare the following:

A report to your partner, containing a detailed description of the differences regarding liability with respect to a sole proprietorship, a general partnership, a limited partnership, and a corporation.

A completed partnership agreement, including the following elements ready for signatures using the partnership agreement included.

Example of Partnership Agreement

Detailed description of the business

Names of the partners

Address of the partnership and the partners

Roles of each of the partners as limited partners, being as complete and detailed as possible (you can also be as imaginative as you need to be with titles and responsibilities )

List of assets provided by each partner

Division of income

Division of partnership liabilities (debts)

Method by which the partnership may be dissolved, including what happens in the event of filing for bankruptcy

(NAME), and (NAME), the below signed hereby enter into this Partnership Agreement on behalf of themselves, their heirs, successors and assigns, and set forth following terms and conditions as constituting the Partnership Agreement in its entirety:

1. The partnership shall go by the following name: (NAME).
2. The partnership's principle place of business shall be (DESCRIBE).

3. The first day that the partnership shall begin business is: (DATE) and it will continue until the partners agree to terminate it or until forced to cease its operations by law.

4. The partnership's operations shall be primarily in the following field or area: (DESCRIBE)

5. The partnership shall be capitalized as follows: For each $ (AMOUNT) (dollars) each partner shall receive (#) shares with contribution being made as follows:

Partner A contributes $(AMOUNT) and shall receive (#) shares, the same being (#) % of the total shares available. Partner B contributes $(AMOUNT) and shall receive (#) shares, the same being (#) % of the total shares available. 6. Losses and gains on contributed capital and other property shall be assigned as follows: (DESCRIBE)

The IRS's general allocation rule shall apply, and gains and losses shall be allocated according to the % of total capital contributed by each partner as set out in paragraph 5 above.

7. Profits and losses shall be allocated according to the same percentage allocation set forth in paragraph #6 above. 8. Salary, if any, for the services rendered shall be determined by unanimous approval of the partners.

Project Partnership Agreement

PARTNERSHIP AGREEMENT

10. Each partner shall maintain both an individual drawing account and an individual capital account. Into the capital account shall be placed that partner's initial capitalization and any increases thereto. The drawing accounts shall be used for withdrawal of amounts, the size of which is limited to $(AMOUNT) on any one day.

11. Adequate accounting records shall be made and maintained. Any partner or his/her agent may review any and all accounting or other records at anytime.

12. The partners designate the following as the Partnership's business and checking accounts into which all the funds of the Partnership shall be placed and maintained: (DESCRIBE)

13. Accounting records and books shall be kept on a (select one) 1. cash basis 2. accrual basis and the fiscal year shall begin on the (#) day of (MONTH) and shall end (#) day of (MONTH).

14. At the close of the fiscal year, there shall be an annual audit conducted by the following accounting firm: (DESCRIBE)

15. The partnership shall dissolve upon the retirement, death, or incapacity of any partner unless the remaining partner elects the option of buying out that partner's share. (DESCRIBE THE DETAILS)

16. Upon termination or dissolution of the Partnership, the Partnership will be promptly liquidated, with all debts being paid first, prior to any distribution of the remaining funds. Distribution shall be made according to the percentage of ownership as set out in paragraph #5 above.

17. Any controversy or claim arising out of or relating to this Agreement, or the breach thereof, shall be settled by arbitration in accordance with the Commercial Arbitration Rules of the American Arbitration Association, and judgment upon the award rendered by the arbitrator(s) may be entered in any court having jurisdiction thereof.

Project Partnership Agreement

9. Control and management of the partnership shall be split equally amongst the partners.

So agreed, this (#) day of (MONTH), 20 .

________________________ (NAME) ________________________ (NAME)

Review - make sure the following items are included in this agreement!

Detailed description of the business

Names of the partners

Address of the partnership and the partners

Roles of each of the partnersâbe as complete and detailed as possible

List of assets provided by each partner

Division of income

Division of partnership liabilities (debts)

Method by which the partnership may be dissolved

Proof read please

In deciding which entity to use for a new business, it is good to review the benefits and disadvantage of each one. A corporation According to e-text (page 1094) A corporation is liable to third person for the act of it is officers, employees, and agent to the same extent that a natural person is liable act of agents and employees. Because of the corporation is a separate legal person debt, the debts that owe are ordinarily the obligation of the corporation only. It is good to know the advantage and the person itself is not responsible of the corporation debts because nobody want debts that goes after their personal properties. I think thatâs the reason business owner choose a form of corporation however, the double taxation of appreciated assets on sale or dissolution is a bad disadvantage but it can be a right choice for certain situation because nobody wants to hold liable for their business debts, or personal income or any other personal assets. An owner always wants taxable profit and retain growth to pay down their business debts, even though the corporations taxes are extremely higher than a LLC, but I still recommended a business to choose a corporation that better benefit for them. A LLC taxes are lower but owner is personally obligator to any debts. It is good to know that corporation can also deduct disability insurance for owner-employees which is a significant advantage, reduced gain for capital gain and audit potential for tax liability A corporation enjoys limited liability, while partner is personal liable for the business. Frost, T. S. (1984). In regard to taxes, a corporation can generate tax saving if the corporate tax rate is lower than the personal one and if earning is retained in the corporation. the worse part will be the shareholder because they can be held personally liable for corporate debt and the creditor can now go after the shareholder property and their bank account and other assets that satisfy their dues. Frost, T. S. (1984). Tax aspects of the form of doing business. Dun and Bradstreet, Inc.D & B Reports, 22(1), 58. Starkman, J. (2007). Advantages of a C corporation. The Tax Adviser, 38(10), 617-618.

lavenderfrog549

Tatiana partnership

The Tatiana Partnership is a calendar year, cash basis limitedpartnership which was formed on 1 January 2014. The partnership isin the business of training attack dogs and cats (business code541990). The address for the partnership and both partners is 300Montgomery Street, Suite 1050, San Francisco, CA 94104. Allbusiness is carried on in the San Francisco Bay Area, and thepartnership has no foreign activities of any kind. The partnershipreturn is filed in Ogden, Utah. The partnershipâs federal ID numberis 94-0070070.

The partnership agreement follows the provisions of IRC section704 and provides that gains, losses, and depreciation will beallocated in such a manner so as to account for the differencesbetween agreed market values and the tax basis of assetscontributed to the partnership. For example, should the agreedvalue exceed the tax basis of a contributed asset, any gain due tothe difference shall be allocated to the contributing partner uponsale of the asset. Any remaining gain shall be allocated in theâregularâ ratio in which partners share income and losses.Furthermore, depreciation expense on contributed assets is to beallocated to the noncontributing partner as if the assetâs FAIRMARKET VALUE were EQUAL to its tax basis; any remainingdepreciation is to be allocated to the contributing partner.

Outside of the special IRC Section 704 allocations discussed inthe preceding paragraph, all other items are allocated in theânormalâ profit and loss ratios for the partnership.

Data on the partners, the assets contributed by them, and theprofit and loss ratios agreed upon are as follows:

Tyr Slesnick (SSN; 007-06-1991), the general partner

Arekay Mitchell (SSN: 006-01-1985), the limited partner.

Tyr â 60% profit and loss ratio. Tyr contributed a parcel ofland (acquired on 1/1/1995 as investment property) and its relatedmortgage. The land originally cost $200,000 and had a fair marketvalue of $300,000 as of the date it was contributed to thepartnership. There was a $180,000 balance on the qualifiednonrecourse mortgage assumed by the partnership. The land is knownas âWhitaker Acresâ. The capital contribution of the land and itsrelated mortgage was made on the date the partnership was formed.The land was used by the Tatiana Partnership as a location to trainthe dogs.

Arekay â 40% profit and loss ratio. Arekay contributed a dogtraining machine valued at $80,000. The dog training machine wasacquired on 1/1/2009 at a cost of $120,000. The machine originallyhad a ten year life (5 years left@ 1/1/2014) and is depreciated onthe straight-line method using a 10 year life at the rate of$12,000 of depreciation per year. Accumulated depreciation of$60,000 ($120,000 cost less $60,000 accumulated depreciationthrough 12/31/2013) as of the date it was contributed to thepartnership.

The partnership keeps its books on the tax basis method withappropriate supporting schedules maintained to keep track of fairmarket value where required. Each partnerâs ownership of capital isper the books.

A. You need to make a journal entry to record Tyrâs capitalcontribution of the land subject ot the mortgage as of1/1/2014.

B. You need to make a journal entry to record Arekayâs capitalcontribution of the dog training machine as of 1/1/2014.

C. On 12/31/2014 (the last day of the year), the partnershippurchases a new piece of land (Darien Acres) for $4,500,000. The$4,500,000 purchase was 100% financed via a $1,000,000 RECORSE LOANfrom Union Bank and a $3,500,000 QUALIFIED NONRECOURSE FINANCINGfrom Wells Fargo bank. The recourse loan plus one yearâs interestat 10% is due in full on 12/31/2014, and no interest is payableuntil maturity. The qualified nonrecourse loan requires quarterlyinterest payments (at an 8% annual rate) with the first quarterlyinterest payment of $70,000 not being due until 3/31/2015 (i.e.,next year). This land will be used as a larger site on which totrain the dogs and cats â i.e., itâll be used as business land.

D. You need to record the depreciation expense on the dogtraining machine. Please note that the machine is deprecated usinga 10 year life for both regular and âalternative minimum taxâ.Depreciation. As noted in the facts, the machineâs tax depreciationis $12,000 ($120,000 original cost divided by 10 years). If themachineâs depreciation had been based on itâs $80,000 FMV, thedepreciation based on FMV would have been $16,000 ($80,000 FMVdivided by the 5 year remaining life). Youâre going to have tofigure out what to do and how to allocate the depreciation betweenthe partners.

E. The business purchased $920,000 of additional trainingequipment. This equipment was purchased on the day the partnershipwas formed, and it has been fully paid for as of the end of theyear. The partnership desires to claim the MAXIMUM depreciationallowed under the tax law, so youâll need to compute this andprepare a journal entry recording the depreciation. The propertywas purchased on 1/2/2013.

F. The property contributed by Tyr was known as âWhitakerAcresâ. This property was SOLD on July 4^th of thecurrent year for $600,000 ($420,000 of cash is shown in a separateaccount, but no entry has been made to record the sale, so youâllneed to make the journal entry necessary to record the sale anddecide how to allocate the gain between the two partners.

REQUIRED:

1. Prepare journal entries to record the events listed in âAâthrough âFâ above. Label the entries âAâ through âFâ>

2. Post the journal entries to the cash activity and prepare aâworking trial balanceâ.

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AFM121 Chapter Notes - Chapter 11: Legal Personality, Limited Partnership, Corporate Tax

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