BUSINESS CASE

Presented to the Accountancy Department De La Salle University

In partial fulllment Of the course requirements In ACTPACO K37

Del Rosario, Tara Margarita, D. March 4, 2013

1. What are the major disadvantages of starting a partnership? ! In a partnership, there is more or less an equal amount of advantages and

disadvantages. Although it may seem like there are many disadvantages, they can be easily counteracted as an advantage -- for example, the amount of prot/loss shared depends on the partners agreement. Therefore it is very important to set the various agreements of the partnership and settle all details during the development of the Article of Co-Partnership. ! The disadvantages of a partnership are as follows: (a) Lack of business continuity because it can easily be dissolved (b) Limited amount of capital may be raised as compared to a corporation (c) Unlimited liability of a partnership (d) A general partner may be subjected to personal liability for erroneous management decisions made by his associates (e) Likelihood of dissension & disagreement when partners have the same authority in management (f) Difculty in transferring ownership interest; it cannot be transferred without the consent of all partners. 2. What type of document is needed for a partnership, and what should this document contain? ! The document needed for a partnership is called the Article of Co-Partnership.

This is basically the written agreement of the two partners including the details on the description and nature of the partnership, as well as the partnership terms. This written agreement is only required when the partnership capital is more than P3,000, -- cash or property. In this case, P2 million will be invested by Jane and P2 million cash and P60,000 equipment will be invested by Richard; therefore the Article of Co-Partnership is required.

The details of the Article of Co-Partnership are as follows: (a) The name of the partnership (b) The names of the partners, addresses of the partners & classes of partners stating whether the partner is a general or limited partner (c) The effective date of the contract (d) The purpose and principal place of business of the business (e) The capital of the partnership stating the contribution of each of the partners (f) The rights and duties of each partner (g) The manner of diving prot and/or loss among the partners (h) The conditions under which the partners may withdraw money or other assets (i) The manner of keeping the books of accounts (j) The cause for dissolution and the provision for arbitration in settling disputes

3. Both Richard and Jane plan to work full-time in the new partnership. They believe that net income or net loss should be shared equally. However, they are wondering how they can provide compensation to Richard Powers for his additional investment of the computer. What would you tell them? ! Usually, the agreement of the division of prot and loss is what is used to

compensate of different partners varying contributions. However, since both Richard and Jane have decided to share these equally, the compensation of Richards additional investment of the computer equipment could possibly be done in two ways. The basic rights of a partner include the right to participate in the management of the business. To compensate, Richard can become the managing partner of the business; one of manages the affairs of the business. This also entitles him to bonuses that Jane will not. Another way is through liquidation; the partners have the right to share in the assets of the business. The partners can agree on what the sharing ratio is for these assets, so Richard can be given a bigger fraction. 4. Richard is not sure how the computer equipment should be reported on his tax return. What would you tell him?

All partners except general professional partnerships are subject to income tax.

Since Richard and Jane only complement each others skills, and are setting up a equipment leasing business, this exemption will not apply. At the end of the year, every partnership must le an information return form that species its taxable income. Along with this, the identity and agreement of each partners in terms of prot and loss shall be submitted. Another form then must be issued to each of the partners, as it is used as a source of income or loss from the business that is included in his or her personal income tax return. In this case, Richards tax may be larger than Janes because of the computer equipment he invested, unless Jane acquired losses. 5. As indicated above, Richard and Jane have worked together for a number of years. Richards skills complement Janes and vice versa. If one of them dies, it will be very difcult for the other to maintain the business, not to mention the difculty of paying the deceased partners estate for his or her partnership interest. What would you advise them to do? ! Since Richard and Jane have been working together for many years, it is to their

advantage that they compliment each others set of skills for the business to run smoothly. The experience of working with each other before setting up a partnership is also very fortunate towards the business, seeing as they know how the other works, etc. In the case of one partner passing away, this will immediately lead to the dissolution of the partnership due to the incapability of the business to operate and/or make decisions without one of the partners. If the business was not ourishing to a high capacity, it would be wise for the partnership to dissolve -- attempting to continue operations may result in further losses. However, if the business was ourishing or was very protable, the partner that is left must be wise in their judgements of making decisions in terms of how to continue operating and to stay protable. Before an unfortunate event such as death could happen, they partners should have other associates prepared as their replacement in case, in order for the business to refrain from even slowing down or acquiring any losses in between making arrangements after a death.