 Professor Farhad and which would look at characteristics and types of partnership. This topic is considered an introductory to partnership accounting. This topic is covered in a financial accounting course, an advanced accounting, which I do cover it much more in details in my advanced accounting course, as well as the CPA exam, the FAR section. As always, I would like to remind you to connect with me on LinkedIn if you haven't done so. YouTube is where you would need to subscribe. I have 1,700 plus accounting, auditing, tax, finance, as well as Excel tutorial. If you like my lectures, please like them, share them, put them in playlists, subscribe to the channel. If they help you, it means they might help other people. Follow me on Instagram on my website, farhadlectures.com. You will find additional resources to supplement your accounting education or study for your CPA exam, CMA exam, enrolled agent exam. So if you're looking to get those extra 7 to 10 points on the CPA exam, my website can help you achieve that. So today, we're going to be talking about partnership. What is a partnership? The partnership is a voluntary association. What is a voluntary association? It means two individual agrees without anyone forcing the other to do business together and to share profit. Basically, it's voluntary. You are not forced into this partnership. Do you have to have a partnership agreement to have a partnership? And the answer is generally speaking, no. It's better that you have a partnership agreement, but you don't have to have an agreement, especially if we are looking at a general partnership. We have a lot of types of partnerships. We're going to look at them in the session, but I'm talking about a general. A general partnership does not need a partnership agreement. As long as both individuals agree in minds to share the profit and remember the keyword is the profit, then they are in a partnership. Eventually, the judge will decide whether you are or not in a partnership, but you can get into a partnership without even knowing. So you don't need an agreement, but in some other partnerships, you need agreements. And we'll look at different types of partnerships shortly. Limited life? Yes, it does have limited life. The partnership used to dissolve as soon as one individual leaves. Now that's not the case. Now you need, there are more rules, but we don't cover those rules in the scores because they're beyond the scope of the scores. They're covered in advanced accounting or in business law, but simply put once the partners decided not to, not to conduct business, then they can decide to end the partnership. And sometimes the partnership ends when one individual leaves. Once again, there are more rules for that. But again, it's beyond the scope of the scores. And the partnership doesn't only have to be two individuals. It can be 50 individuals and still be considered a partnership. What else do we need to know about partnership? The taxation? Guess what? You only pay taxes to Uncle Sam once. What does that mean? It means when the business makes a profit. Let's assume you are running a partnership. You and your body, your friend from high school. The partnership made $300,000 in revenues incurred $200,000 in expenses. And the two of you made a $100,000 profit or net income. And here's what's going to happen. This profit, it's going to go to you. And let's assume it's 50 50. So you're going to get 50,000 of the profit. And your partner and the partnership gets the other 50,000. Guess what's going to happen? This 50,000 and this 50,000 go to your taxes. You pay taxes on this 50,000. And your partner pay taxes on the 50,000. Sorry, I want to make sure the part your friend, your partner. So notice the partnership here did not pay any taxes. Just you we took our revenues minus expenses. There was no taxes. No taxes paid on this level. So it's going to pay the taxes, you'll pay the taxes, you might pay 10% and you may end up paying $5,000. Your friend might pay 50%. I don't know, but there's no 50%. That's way too high. They might pay 20% and they might pay $10,000. Why? Because they are in a different tax bracket. Simply put, the individual you and your friend pay the taxes, not the partnerships. So as far as taxation, the money is taxed only once, not twice. The mutual agency, this is very important in partnership. If you are a partner, you can represent the company. So you can if you made a purchase on behalf of the partnership, and the other party has no reason to believe otherwise, then you bind your partnership. So you have to be very careful because you represent you as an agent, you have a mutual agency, you have you are an agent of the company. In contrast to a corporation, if you own stocks in a corporation, you are an owner, but you don't have this agency, you don't have that mutual agency, you can not bind a corporation, but you can bind a partnership. You sign a document saying I you represent a certain partnership and you are a partner. Guess what? The whole partnership is bind by that by that signature. Co ownership of property also when you went when the property aren't are contributed, everyone is co owner everyone can use the property obviously for without saying this for business use you cannot just use the property it has to be for business use but basically everyone owns the property. Let's talk about unlimited liability before we start unlimited liability here we are dealing with a general general partnership. So that's very important. I mentioned this earlier. You'll have a general partnership under a general partnership. You have unlimited liability so you don't have you don't you are lacking limited liability limited liability protects you from the government from the creditors from lawsuit personally. Okay, so so you are protected personally from those liabilities in a general partnership in a general basically, you know, general like an army general if it's a general partnership, you have unlimited liability. We're gonna see shortly that with certain type of partnership, you do have limited liability but not as a general partnership. So now let's take a look at the types of partnership. The first one is limited partnership one way I say limited partnership. That's in contrast to the general partnership. I was discussing so far. Remember general partnership you don't need an agreement you have unlimited liability, simply put two individuals agree to do business together and share the profit. Now this is a different type of partnership. A limited partnership. It's different. And when do you have a limited partnership? Let's assume you have money. Okay, you have a lot of money. And I have a great idea. I want to start an accounting tutoring business. Let's see. I'm going to go to you that's you. And I'm going to ask you I need money. I need money to start this business. I need money to build the website. I need the money to market. And if you don't mind, I can you can be my partner and we can share in the profit. Well, you would say hold on a second. I like your idea. Look, I heard that in a partnership. I have unlimited liability. I am not gonna go into this business because I don't want to lose everything because I don't know anything about tutoring accounting. I would say don't worry about it. I will be I have the idea I will be a general partner. And you will be a limited partner. So now what happened together, a general partner plus a limited partner will form an LP a limited partnership. A limited partnership would meet at least or you could say look, I will or you would say look, I don't mind investing with you, but I want you to bring someone else. So I will look for someone else and I went to my brother and my brother said, okay, I'm willing to put money, but also I want to protect myself. Therefore, I'm only a limited partner. Then I said, okay, let me go to my neighbor and my neighbor said the same thing. So now we have a partnership with three LPs, three limited partners, and one, which is I am take I am the I am the owner of the idea. I am the general partner. That's okay, we can have 60 LPs, and one general partner. But if I leave, if you don't have a general partner, you cannot have a limited partnership. Because without without someone taking the blame, you cannot have a limited partnership. So you need always need a general partner. So what are the characteristic? The general partner assume management duties and unlimited library for the partnership. So I do assume look, I conduct all the business you have no saying in the business. But guess what? I also have unlimited liability. So I run the business, although you gave me the money, you are a you are considered a silent partner. So you are in the business, but you have no saying and be careful don't, you know, don't get involved because you become an active partner before you know it in the eyes of the law. So limited partners have no personal liability beyond invested amounts. So notice, you are protected, because you have no idea how the business of tutoring work. Therefore, you don't want to get into this. You just you're willing to give me the money. You trust my idea. But that's as far as you want to go. So you are considered a silent partner. You're not supposed to make any management decision. Unless maybe I hire you because I am in charge. And therefore, but you are protected. That's one type of partnership. Another type of partnership. They are called LLP. This is a limited liability partnership. Well, limited liability partnership sounds like limited. Yes, it is limited. But it's limited in a different way. So how does it work? It protect the innocent partners from the malpractice or negligence claim. Let's assume you and I, we both work in a CPA firm. And we do taxes for individuals and businesses and we do audit. And guess what? You, you completed an audit for a client and you messed up. You missed some fraud that's going on that you were supposed to discover or actually you overlooked it. It doesn't matter to make the long story short, the client sued you or the bank sued you. And they sued you for malpractice because you did not do your job. Guess what? You will be sued personally. Because if I'm partnered with you, I cannot be responsible for your malpractice or negligence. Why because we are running under an LLP. And this is why doctors, lawyers, accountant form LLP is this way you are protected from the malpractice of the other partners. Now, if the partnership has that, well, we're all responsible for that. Okay. So most state hold all partners personally liable for the partnership that in state laws are different across state, but that's the big idea for an LLP. The last type of partnership or quasi partnership is LLC limited liability company sounds like LLP, but it's like more like an LLC. Here the the partners are called members. And they have the same liability features as corporation. It means they have limited liability, they all have limited liability. And a limited partnership will typically have a limited life. That's the idea of a limited partnership is you go into a project with several people, but but it's for a period of time, period of time, therefore, you don't want sorry, period of time, there, therefore, the best way to do it is to, is to form an LLC. So basically, this project maybe is for three years. We went in to build a maybe a real estate, real state industry. Sorry, not real estate industry, maybe to build a mall, then rent it out. That's the whole project. That's why we are in business together. Therefore, it's for a period of time. Well, how we did is we form an LLC. Now, choosing a business for remember how you want to operate. Remember, we have different types of businesses. We have a sole proprietorship. We have partnership. And when we say partnership, we mean a general partnership when we don't specify. Here we have LLP LLC escort and secorp. So now we're going to look at some characteristics of different type of businesses. Which one of them is a legal entity? Well, well, the sole proprietorship is not a legal entity. In other words, you and the business. So if you operate a business under your name or under your social security without being incorporated, there's you are the business. So it's not a legal entity. Same thing if you are a partner and a partnership, you have no legal entity, the business and you are the same. If you operate your business under LLP limited liability partnership, you have no legal entity, you are the business. If you operate your business as an LLC, remember LLC sounds like a corporation. It is like a corporation. You and the business are separate. If you operate your business as an S corporation, which is a hybrid form between corporation and partnership, there is a legal entity escort C corporation. Definitely you have a legal entity. And I hope you already looked at the corporation chapter. So those are as far as legal entity are concerned limited liability. Look, if you if you run the business yourself and you are the business, you have low, no limited liability. You they can come after you personally partnership. Again, we're talking about a general partnership. You have no limited liability LLP. Well, it depends. You might be protected from the malpractice of other partners. Okay, we talked about this LLC. That's the beauty of LLC under LLC and notice once you once once the business is a separate legal entity, then it has protection. Once the business is a separate legal entity, it has protection. Once the business is a separate legal entity, that's part of being a separate legal entity is part of the main reason is to have protection. The other the other major reason for business is business taxed. How is the business taxed? Do you remember when we talked about what we talked about in this chapter that the partners pay taxes on the income of the business? Like you remember that I said 300,000 minus 200,000. We made the profit of a thousand and this profit went 50 50 to each partner and each partner paid the business the business they the tax separately. Guess what? If you're a sole proprietorship, it works the same way. If you're an LLP, it works the same way. If you're an LLC, it works the same way. If you're an S corporation, it works the same way. Simply put this 50,000 this I'm sorry this 100,000 remember I'm going to highlight this 100,000 this 100,000 is taxed only taxed only taxed only once simply put this 100,000 is taxed only once when it comes to a corporation and that's the only thing that's different when it comes to a corporation this money is taxed twice simply put here's what's going to happen. First the corporation pays 21,000 in taxes which is 21% then what's left after 20 after the 20 21,000 is 79,000. Now this 79,000 is split 50 50 to each partner and what is 70 what's 79,000 we're talking 35 39,500 if my math is right I'm splitting this in half then you have to pay taxes and your friend the partner will have to pay taxes again so you have double taxation so here is the business tax and the answer is yes the business is taxed and the owners are taxed later for the 39,500 the leftover so the business is taxed twice. How many owners are allowed for a sole proprietary ship by definition it's one owner soul is one partner partnership obviously by definition it's more than one could be two five 20 25 100 so you cannot have one owner LLP by definition it's a partnership you cannot have it you cannot have you cannot have a one partner LLC company yes one person can own the company that's fine S corporation it's a corporation one person can own the corporation C corporation of course one person can own 100 percent of the corporation that's also fine as well now if you like this recording please like it share it put it in playlist let the world know about this visit my website if if you feel this is helpful i do have additional resources to help you succeed and in the next session i would look at entries to form a partnership we're going to start to dive into the accounting concept study hard stay safe especially do coronavirus days good luck