Funding the Partnership - Explained
What are the considerations?
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How is a Partnership Funded?
This is a very complicated topic that draws upon ones knowledge of tax law. The partners fund the partnership by contributing assets to the partnership. The value of the assets contributed to the partnership is in exchange for an ownership interest in the partnership.
How does funding the partnership create compensation and tax issues?
If partners contribute assets of equal value and ownership of the partnership is divided equally, then there is no tax issue. If, however, one partner contributes assets of greater value and the ownership interests are equal, then the partner contributing property of a lower value is treated as having received income from the partnership. The income attributed to this partner equals 1/2 of the difference between the value of the property contributed. This is as a form of phantom income.
A partner may have a basis (amount of money invested) in property that is higher or lower than the actual value of the property contributed to the partnership. The partner does not generally recognize any income or losses when contributing this property to the partnership. The partnership, however, takes a basis in the property equal to that of the contributing partner.
The situation gets very tricky when the partner receives some kind of value other than an ownership interest back from the partnership. This other value is known as boot.
The situation is further complicated if the partnership later disposes of the property. There is a significant issue as to how the profits or losses are allocated for tax purposes. The issue of taxation is discussed further in the Startup Accounting Resources text.
- Business Entities (Intro)
- Why is studying business entities important?
- Considerations When Forming a Business Entity
- Holistic (Detailed) Overview of Setting Up a Business Entity
- What are Business Entities?
- What is a Closely-held vs Publicly-held Business?
What are the main types of business entity?
- What are the primary characteristics of business entities?
- What is Maintenance of a business entity?
- What is Control of a business entity?
- What is Compensation of business owners?
- What is Taxation of a business entity?
- What is Sales & Use tax?
- What are payroll and self-employment taxes?
- What are the major characteristics of a Sole proprietorship?
- Uniform Partnership Act
- Uniform Limited Partnership Act
- Partnership Agreement
- At-Will Partnerships
- Responsibilities of Partners to the Partnership
- Silent Partner
- Funding the Partnership
- How are Partners Compensated
- Splitting Equity in an Industrial Partnership
- What are the main characteristics of a Limited liability partnership?
- What are the main characteristics of a Limited liability company?
- Forming an LLC
- Articles of Organization
- Operating Agreement or LLC Agreement
- Why You Need an LLC Agreement
- LLC Compensation of Members
- LLC Taxation
- Converting to an LLC
- What are the main characteristics of a Corporation
- Articles of Incorporation
- What to include in the Articles of Incorporation
- Corporate Bylaws
- Exiting the Corporation
- Dissenter's Rights
- What are the requirements to be an S Corporation?
- Non-Profit Organization
- NonProfit Business Entities
- Private Foundation
- A Detailed Explanation of the Sole Proprietorship
- Taxation of Sole Proprietorship
- A Detailed Explanation of the General Partnership
- 50/50 Partnerships: Never a Good Idea
- Publicly-Traded Partnerships
- A Detailed Explanation of the Limited Liability Company
- A Detailed Explanation of the Corporation
- Keepwell Agreement (Letter of Comfort)
- Personal Service Corporation Definition
- A Detailed Explanation of the Non-Profit Entity
- Public Limited Company (UK)