Organizations with Partnership Characteristics

Organizations with Partnership Characteristics

Organizations exist that combine certain characteristics of partnerships with other forms of organizations. We discuss several of these forms in this section.

Limited Partnerships
Some individuals who want to invest in a partnership are unwilling to accept the risk of unlimited liability. Their needs can be met with a limited partnership Partnership that has two classes of partners, limited partners and general partners.. This type of organization is identified in its name with the words “Limited Partnership” or “Ltd.” or “LP.” A limited partnership has two classes of partners, general and limited. At least one partner must be a general partner Partner who assumes unlimited liability for the debts of the partnership; responsible for partnership management., who assumes management duties and unlimited liability for the debts of the partnership. The limited partners Partners who have no personal liability for partnership debts beyond the amounts they invested in the partnership. have no personal liability beyond the amounts they invest in the partnership. Limited partners have no active role except as specified in the partnership agreement. A limited partnership agreement often specifies unique procedures for allocating income and losses between general and limited partners. The accounting procedures are similar for both limited and general partnerships.

Decision Insight Nutty Partners The Hawaii-based ML Macadamia Orchards LP is one of the world’s largest growers of macadamia nuts. It reported the following partners’ capital balances ($ 000s) in its balance sheet: ▪

Limited Liability Partnerships
Most states allow individuals to form a limited liability partnership Partnership in which a partner is not personally liable for malpractice or negligence unless that partner is responsible for providing the service that resulted in the claim.. This is identified in its name with the words “Limited Liability Partnership” or by “LLP.” This type of partnership is designed to protect innocent partners from malpractice or negligence claims resulting from the acts of another partner. When a partner provides service resulting in a malpractice claim, that partner has personal liability for the claim. The remaining partners who were not responsible for the actions resulting in the claim are not personally liable for it. However, most states hold all partners personally liable for other partnership debts. Accounting for a limited liability partnership is the same as for a general partnership.

Point: Many accounting services firms are set up as LLPs.

S Corporations
Certain corporations with 100 or fewer stockholders can elect to be treated as a partnership for income tax purposes. These corporations are called Sub-Chapter S or simply S corporations Corporation that meets special tax qualifications so as to be treated like a partnership for income tax purposes.. This distinguishes them from other corporations, called Sub-Chapter C or simply C corporations Corporation that does not qualify for nor elect to be treated as a proprietorship or partnership for income tax purposes and therefore is subject to income taxes; also called C corp.. S corporations provide stockholders the same limited liability feature that C corporations do. The advantage of an S corporation is that it does not pay income taxes. If stockholders work for an S corporation, their salaries are treated as expenses of the corporation. The remaining income or loss of the corporation is allocated to stockholders for inclusion on their personal tax returns. Except for C corporations having to account for income tax expenses and liabilities, the accounting procedures are the same for both S and C corporations.

Limited Liability Companies
A relatively new form of business organization is the limited liability company Organization form that combines select features of a corporation and a limited partnership; provides limited liability to its members (owners), is free of business tax, and allows members to actively participate in management.. The names of these businesses usually include the words “Limited Liability Company” or an abbreviation such as “LLC” or “LC.” This form of business has certain features similar to a corporation and others similar to a limited partnership. The owners, who are called members, are protected with the same limited liability feature as owners of corporations. While limited partners cannot actively participate in the management of a limited partnership, the members of a limited liability company can assume an active management role. A limited liability company usually has a limited life. For income tax purposes, a limited liability company is typically treated as a partnership. This treatment depends on factors such as whether the members’ equity interests are freely transferable and whether the company has continuity of life. A limited liability company’s accounting system is designed to help management comply with the dictates of the articles of organization and company regulations adopted by its members. The accounting system also must provide information to support the company’s compliance with state and federal laws, including taxation.

Point: The majority of proprietorships and partnerships that are organized today are set up as LLCs.

Point: Accounting for LLCs is similar to that for partnerships (and proprietorships). One difference is that Owner (Partner), Capital is usually called Members, Capital for LLCs.