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Test bank For Advanced Accounting Exam 2: Chapters 9 & 10 (15th Edition by Joe Ben Hoyle)
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Test bank For Advanced Accounting Exam 2: Chapters 9 & 10 (15th Edition by Joe Ben Hoyle)
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Test bank For Advanced AccountingExam 2: Chapters 9 & 10 (15th Edition by
Joe Ben Hoyle)
Advantages of a partnership
ØFor formation, only an oral agreement is necessary to create a legally binding partnership.
ØDepending on specific state laws, incorporation requires filing a formal application and
completing various other forms and documents.
ØOperators of small businesses may find convenience and reduced cost
-Avoids double taxation
Treatment of partnership income
Partnership revenue and expense items (as defined by the tax laws) must be assigned directly
each year to the individual partners who pay the income taxes.
Passing income balances through to partners avoids double taxation of profits earned and
distributed to owners.
-Partnership income is taxed only at the time the business initially earns it.
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Treatment of Partnership Operating Losses
Income is taxable to partners as the business earns it; operating losses reduce their personal
taxable income directly if they materially participated in the business.
A corporation is viewed as legally separate from its owners, so losses cannot be passed
through to them.
A corporation has the ability to carry back net operating losses and reduce previously taxed
income and carry forward remaining losses to decrease future taxable income.
For a new corporation or an unprofitable one, operating losses provide no immediate benefit.
Partnership Disadvantages
Unlimited liability that each partner automatically incurs.
Any partner can be held personally liable for all debts. (mutual agency)
Potential risk is significant when coupled with mutual agency, the right each partner has to incur
liabilities in the name of partnership.
Partners acting within the normal scope of the business have the power to obligate the company
for any amount. If the partnership fails to pay the debts, creditors can seek satisfactory
remuneration from any partner they choose.
S-Corporation
Has all legal characteristics of a corporation.
Taxed in virtually the same way as a partnership.
Ownership limited to 100 stockholders.
Owners limited to individuals, estates, certain tax-exempt entities, and trusts. (NOT C-Corps)
Growth potential limited due to restriction on number and type of owners.
Limited Partnership (LP)
Tax benefits of a partnership.
Partners do not want to work in partnership or have unlimited liability.
, Number of limited partners invest money as owners but are not allowed to participate in
company's management.
Partners can incur a loss on their investment, but it is restricted to what has been contributed.
To protect creditors, one or more general partners must be designated to assume responsibility
for all obligations created in the name of the business.
Limited Partnership (LP) part 2
Has most characteristics as a general partnership but it significantly reduces the partners'
liability.
Partners may lose investment in the business.
Responsible for contractual debts of the business.
The advantage is in connection with any liability resulting from damages.
Partners are responsible for only their acts or omissions and those of individuals under their
supervision.
Limited Liability Corporation (LLC)
Relatively new type of organization in the United States.
Long used in Europe and other areas of the world.
Classified as a partnership for tax and court purposes.
Depending on state laws, owners risk only their own investments.
Similar to a Subchapter S, LLC provides liability protection for its owners and managers.
In contrast to a Subchapter S corporation, the number of owners is not usually restricted so that
growth may be easier to accomplish.
Capital Accounts
Provides limited amount of equity disclosure in individual capital accounts accumulated for
every partner or every class of partners.
Balances measure each partner's or group's interest in the book value of the net assets of the
business.
Does not differentiate between sources of ownership capital.
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