 Hello, and welcome to this session in which we'll discuss the concept of partnership. What is the big idea of a partnership? Well, a partnership is an association formed by two or more individuals. Now when we say partnership, we always think of two people, but a partnership it has to be at least two people. Why did they form this association? Why do you form a partnership? Well, the purpose it's the meeting of minds and effort to carry a business, to carry on for a trade or a business, to make a profit and share that profit. As a partner, which we're going to talk about at the partners later on, you can contribute money to the partnership. In other words, you can give money to that business. You can contribute property and obviously you can contribute your labor and your skill. That's the most important usually in a partnership. But basically that's what happened. You want to start a business, you form a partnership. Now you got to keep in mind, you are going to be sharing at the end of the day the profit and loss of that partnership. So the loss and the profit, it will go to you as a partner. Now we're going to talk about the taxation in this session. In the next session, I will talk about how that profit and loss is a flow through flow through to you as a partner. Before we proceed any further, I have a public announcement about my company, farhatlectures.com. Farhat Accounting Lectures is a supplemental educational tool that's going to help you with your CPA exam preparation, as well as your accounting courses. My CPA material is aligned with your CPA review course, such as Becker, Roger, Wiley, Gleam, Miles. My accounting courses are aligned with your accounting courses, broken down by chapter and topics. My resources consist of lectures, multiple choice questions, true, false questions, as well as exercises. Go ahead, start your free trial today. Now, who can be a member in a partnership? Well, who can be a member? A member can include an individual, which is a person like you and I, a trust, an estate, a corporation, an association. Another partnership can be a partnership as well. What are the characteristics of a partnership? Well, it can be an unincorporated entity. Simply put, you could have a partnership without any formal paperwork. Just two individuals agree to conduct business together and you don't need anything. That's it. You have a partnership. However, a partnership cannot be classified as a corporation, trust or an estate, but those, they can be a member of the partnership. What type of partners do we have? Well, partnership entities are defined under state laws and usually we have two types of partners. We could have a general partner or general partners and limited partners. Now, I'm going to give you a real quick and overview about why do we have general partners? Why do we have limited partners? It gives you an idea about why they are called general, why they are called limited. We're going to look at this individual with a business idea. So this individual has a business idea and this individual has the money. So here's what's going to happen if you have a great idea for a business. Well, most likely, if you have a great idea, you don't want to share it with anyone. You want to go ahead, start your business and see if it works and make make a lot of money. But sometimes you have a great idea, but you need the money. You need the money to manufacture the product. You need the money to market. You need the money to expand your business. Whatever it is, you have an idea for a business, but it's not good enough. So what you do, you'll ask someone with money to give you the money. And this is usually how we form a partnership. Now, why do we call certain partners, general partners and the others limited? The general partners, think of them as the people with the idea. Those are the people that are going to manage the company, manage the business, participation and entity management. So if someone comes to me with an idea and I have the money, I may have no clue about what that business is about. But from an accounting perspective, the business makes a profit. It looks good. I'm going to make money. Therefore, I invest, but I don't know how to run the business myself. Therefore, the general partners are the people that run the business. And also because you're a general partner, you are responsible to repay the recourse debt. Now, you have to understand the general partner is on the hook. What does that mean? If it means if anything happens, if anything happens, they are responsible for the debt. Now, we have to understand that a recourse that what's a recourse that versus unrecourse that recourse that is type of a loan that is secured by a collateral that allowed the lender to go after the asset of the borrower of the default. It means this individual here with the idea of anything happened to that loan, they can go after you personally. They can go after you personally. So they're taking more risk. Why? Because they only brought the idea and they believe in their right in your idea. If you believe in your idea, you're going to be taking more risk. The limited partners, sometimes they are called the silent in a sense silent that they don't participate in management. They have limited to no participation in management. And if I was a limited partner, I will try not to participate in limited liability for partnership debt. So the maximum they can lose is what they invested in the company. Simply put, they limit their risk in terms of the partnership debt. They limit to what they contributed. So you cannot go after the limited partner personal asset, but you can go after the general partner personal asset because the general partner is the owner of the idea, the owner of the business really. And that's how we have to look at it. So it's very important to understand what is a limited partner versus a general partner. What are limited partners and general partners? Why? Because when we discuss types of partnership, that's what's going to really define the types of partnership. We could have a general partnership. We could have limited partnership. We could have limited liability company, a company LLC. We could have a limited liability partnership. So we're going to discuss each type of partnership separately, but knowing the type of partners would help facilitate that discussion starting with general partnership and a general partnership. You don't have any limited partners. So no limited partners are not no limited. You don't have any limited. So you might have two, three, four, five individuals and they are all general partners. What does that mean? They are all participating in the management of the partnership. Some common use for this type of partnership. It could be for anything, but it could be for operational activity like product manufacturing or sales, corporate joint venture, as well as any other business. It offers flexibility because the management shares among partners. So everyone is a managing partner in this partnership. Bear in mind, what's the risk of this is you are personally, personally liable for the partnership debt. So if the partnership fails, they're going to come after you personally, not only the business asset, the partnership asset, they will go after you personally. It's a popular choice for business and it's engaged in operating activities and collaborative ventures. But I don't like general partnership. I don't like partnership in general. Just it's a personal preference, but in a general partnership, everyone is responsible for everything, basically, management as well as that limited partnership is a little bit different and limit in limited partnership. You have to have at least you have to have at least one general partner. So you cannot have a limited partnership. So you can have, let's assume we have a partnership. OK, one of the one of the partners has to be a general partner, this this person in blue. So we have four individuals. You cannot have a limited partnership without having one general partner. If a general partner is gone, the limited partnership no longer exists. Why? Because you need this blue individual to be responsible for the debt of the company. So at least you need one general partner. Obviously, you would need at least one limited partner because it's called limited partnership. So in a limited partnership, you have at least one general partner, one limited partner. You have to have a general partner. It will not exist without it because you need someone to be responsible for the debt. Limited partnership. Again, as I mentioned earlier, when I when I spoke about partnership, it's utilized to secure capital for activities. Why would you have a limited partnership? Again, because you have a person with an idea. Which is the general partner and people with money. And this individual, they want the money. If they want the money, they're going to they're going to take the risk. They're going to take the risk. Therefore, you need them to exist in a partnership to take the risk. This could be a limited partnership. Are you are used in oil and gas exploration, research and development and financial product investment? This is, you know, typical businesses and limited partnership could involve many limited partners. So you could have many people that can contribute money. You could have 10 people and one general partner. So this general partner is really responsible for the business. The other people are just what are they? They are investors in a sense. They are investors. Now, to minimize the liability for this type of partnership, the general partners, there's a way around this, are frequently entities with limited liability, such as a C corporation or limited liability LLC, which we will discuss next. So what you will do. Yes, you will become a general partner, but what you do is you become C corporation and you will become a general partner in a limited partnership as a C Corp Y to limit your liability. Or you become an LLC limited liability company as a partner in a partnership. Now, this structure allowed for reduced exposure to the entity's liability while facilitating capital raising for various entities. And this is why you do this. You want to raise the money, but also you want to have limited liability and LLC, we just talked about this in a moment. LLC is a structure where the owners are called members. Just the technical terms. It's a hybrid role resembling both a limited partners and active participant. So in an LLC, it's a hybrid business. Members enjoy the limited liability for the company that similar to limited partners, but also they can participate in management. So in an LLC, if you remember, it's the both of both words. You can participate in management, but you have a limited liability. Limited liability. Again, it's how you structure it. So it provides the advantage of limited liability similar to a corporation. That's what it's called the company, which also benefit from the partnership taxation, which include the avoidance of double taxation. So from tax perspective, we will see next in the next session, it's treated as a partnership. So you can participate in management as at the same time, you have a limited liability like a part, like a shareholder and a corporation. Limited liability partnership. This is an LLP. Well, LLP is very similar to a general partnership where everyone is responsible for everything. That's fine. So what is difference between the LLP, limited liability partnership and a general partnership? Because it's like a general partnership. Here's the difference. The difference is an LLP, limited liability partnership. The partners themselves are shielded from personal liability for the malpractice of other partners. So think about a doctor's office. You could have a few doctors, four, five, six, seven. Here's what's gonna happen. Let's assume one doctor conducted a malpractice. They, you know, and they were sued by a client. You could have five doctors in that office. Guess what? The other four, so if you have five and this individual committed, you know, a malpractice. They had, they prescribed the wrong medication. During the operation, they made a major mistake due to negligence. It doesn't matter. They committed some malpractice. The other partners are shielded from the malpractice. Listen to me carefully. Only from the malpractice of other partners. Now if the business fails, everyone is responsible for the debt from a business perspective. But if one individual committed malpractice, whether it's a law firm or an accounting firm and one person committed a mistake, the firm is sued, guess what? The other partners are protected. So each partner will have basically malpractice insurance and the suing party will go over that doctor or over that party, whatever that party is, doctor, lawyer, accountant, whatever. This makes LLP particularly popular among large accounting firms and various service providing entities like law, health. That's why you see when you go to the doctor or your lawyer, it's formed as an LLP to protect the innocent partners. The LLP provide a level of production for individual partners while maintaining the benefit and flexibility of a partnership. Now, you can have a partnership agreement. You don't have to, but you should. For example, a general partnership, you don't need to have an agreement. Although it's a good idea to always have an agreement. That's a contractual document that's signed by each member involved in a partnership. For what purpose? The agreement serves to outline the rights and responsibilities of the partners, including how we allocate the income, deduction and cash flows, specify the requirement for the initial contribution. How much money am I putting and what's my partnership? Condition if you want to terminate this partnership and addresses other important matters like if you want to include a new person or if you want to basically change the business. What do we do? And this agreement is crucial for providing essential information for tax preparation purposes. Sometime you have to go back to the partnership and determine how things are split between the different partners and include information about specially guaranteed payment and other tax relevant issues, such as contribution and distribution of capital because we want to see how we're gonna be taxing those transaction. So this is basically an introduction of partnership or introduction to partnership where we looked at the type of partners and the types of partnership. We did not dive into the taxation yet. In the next session, we will dive into the taxation. What should you do now? Well, the far hat lectures and look at additional resources, lectures, multiple choice, true, false. That's gonna help you do what? Learn this topic better, whether you are a CPA candidate an enrolled agent or an accounting student. Invest in yourself, good luck and stay safe.