Partnership is one of the popular business structure, it comprises any entity made up by two or more individuals, which are called partners. The structure considered easy to form and has cost saving advantages.
Under partnership structure, the capital contributions from all partners will be recorded, each partner has individual capital account to reflect all activities and transactions including contributions, distributions and etc. The interest of partners in the business can be measured by the balance of its capital account against the book value (Hoyle, Schaefer, & Doupnik, 2015).
The contribution of partners would be the first records in the accounting book, while partners could contribute both cash and noncash assets, the cash contribution would be debited to the cash account and credit to the capital accounts, other non cash assets would be recorded at fair value for tax accounting. The intangible contribution made by partners, such as expertise, personal connections require special accounting treatments, can be recorded through the bonus method or the goodwill method. The bonus method would only recognize the identifiable contributions while the goodwill method would record an estimated value for the intangible asset, the amount recorded can be capitalized under this method.
Split of Profit and Losses
The split of profit or losses among partners usually take place at the end of a fiscal period. The “income summary” will be created as a temporary account through the closure of all revenue and expense accounts. Partners might allowed to make withdrawals from the business throughout the year, therefore, the balance of income summary would be compare with the partners’ capital accounts before making income allocation. When closing the income summary account, the profit or loss of the business would be allocated to the partner’s capital account based on their agreement. If the partners did not made any agreements on the allocation, the state laws require equal allocation among all partners. A profit and loss split illustration is presented in the exhibit A
If the business needs to be dissolved, all assets of the business would be sold to liquidate the business in order to pay creditors and remaining balance would be allocated to the partners based on individual capital balances. The process of dissolovement start with the termination of partnership, the business could continue with its operation during the winding up period. A statement of liquidation would be offered to the partners to report the progress. The partnership became insolvent became more complicated as they have to use personal assets to absorb the deficit in the business. The partners who paid the differences could get recover from the insolvent partnership up to the amount of the contribution made (Section 806(2)(d)), however a safe payment would be made to the member assume the deficit would be recovered. The partnership is formally terminated once the insolvent partner has made additional contribution or the losses have been absorbed by other partners with an agreement. Sample cash distribution schedule presented in the exhibit B.
Corporation is also one of the popular structure, the discussion over “voluntary bankruptcy” and “involuntary bankruptcy” has been performed in this section.
A business corporation can undergo two types of bankruptcy, the Chapter 7 and Chapter 11 bankruptcy. Under Chapter 7 Bankruptcy, a trustee would be appointed by the court to handle the proceedings, the corporation operation would all seized unless the trustee authorized continuation of operation for a short time period (U.S. Code Chapter 7, n.d.). The asset of the business would be sold to pay off the debts and creditors, the corporation is discharged once all of the requirements ordered from the court have been met. The Chapter 11 bankruptcy on the other hand is different, the business would continue to operate, aside from a trustee would be appointed to oversee the process, two committee would be formed under the court order to ensure all stakeholders have been fairly represented, through one committee of creditors and one committee of stockholders (U.S. Code Chapter 11, n.d.). The business would develop a reorganization plan, the plan has to be approved by the court and the creditors. The purpose of the reorganization plan is to renegotiate the debt and allow the business to recover. There is also ethical implication on filing bankruptcy, as if the business is truly in the situation for not being able to pay off the debt on time, it is unethical for business to file for bankruptcy if the business has the ability to settle the debt (Chestnutt, n.d.).
Involuntary bankruptcy happens in rare cases, it refer to the situation that creditors made file the petition to force the business into bankruptcy, and the creditors can collect the debt through sale of the company’s assets. The creditors can made petition through either Chapter 7 or Chapter 11, however, if a Chapter 11 claim were made, it is forbidden for creditors to made the conversion to Chapter 7. See exhibit C for a sample balance sheet and statement of financial affairs for a liquidated business.