Partnerships: Introduction and Formation

Definition
By the contract of partnership two or more persons bind themselves to
contribute money, property or industry to a common fund, with the intention of
dividing the profits among themselves.
Two or more persons may also form a partnership for the exercise of a
profession (Art. 1767, Civil Code of the Philippines)
 Partnerships: Introduction and Formation

Characteristics of a contract of partnership

1. Consensual perfected by mere consent
2. Contribution of money, property or industry to a common fund
3. Lawful object (Art. 1770)
4. Intention of dividing the profit among the partners (Art. 1799)
5. New personality separate from owners (Art. 1768)
6. Affectio societatis desire to formulate an active union wherein mutual
confidence and trust exist
7. Voluntary association
8. Mutual agency (Art. 1818)
9. Co-ownership of partnership property (Art. 1811)
10.Unlimited liability
 Partnerships: Introduction and Formation

Advantages of a partnership
1. Ease of formation and dissolution
2. Greater amount of capital
3. Wider network
4. Freedom and flexibility in decision-making
5. Better management
Disadvantages of a partnership
6. Lack of business continuity
7. Difficulty in transferring ownership interest
8. Likelihood of disagreement among partners
9. Limited amount of capital
10.Unlimited liability
 Partnerships: Introduction and Formation

Kinds of partnerships
According to activity
1.Service
2.Trading
3.Manufacturing
According to liability
4.General
5.Limited
According to object
6.Universal partnership of all present property (Art. 1778)
7.Universal partnership of profits (Art. 1780)
8.Particular partnership
 Partnerships: Introduction and Formation

Kinds of partners
According to investment
1. Capitalist
2. Industrial
According to liability
3. General
4. Limited
According to participation
5. Managing
6. Silent
 Partnerships: Introduction and Formation

Kinds of partners
As to third persons
1. Secret
2. Dormant
3. Nominal
 Partnerships: Introduction and Formation

Articles of partnership
voluntary contract between or among partners to place their capital, labor
and skills in business with the understanding that there will be a sharing of the
profits and losses between or among themselves
a contractual agreement that establishes the legal relationship between
partners
 Partnerships: Introduction and Formation

Content
1. Name of the partnership
2. Principal office of the partnership
3. Names, citizenship and residence of partners
4. Term or duration of existence
5. Purpose/s
6. Resources/assets contributed by each partner
7. Name of managing partner
Partnership accounting
8. Plurality of capital and drawing accounts
9. Partners loans and borrowings
10.Division of profits and losses
 Partnerships: Introduction and Formation

Guidelines on formation of a partnership

1. Cash investments are recorded at face value.
2. Non-cash investments are recorded at fair value.
3. When a sole proprietorship is converted into a partnership, its books will be
closed whether or not its books will be used by the partnership.
4. All partners must agree to the values assigned.
 Partnerships: Introduction and Formation

At the start of the year, Nick Lazzarini, Blake McGrath and Ashle Dawson decided to form
LMD Company, a general partnership. Lazzarini contributed cash amounting to P700 000.
McGrath invested an office building in the partnership. The building originally costs P1.5M,
and a useful life of 20 years with no residual value. At the time of the formation, the
building had a remaining life of 17 years, but its fair value was P1.3M. Dawson was
appointed the managing partner of the firm, and only her expertise will be invested in it.
Prepare the necessary journal entries to record the formation of LMD.
 Partnerships: Introduction and Formation

On Jan. 1, 2012, Travis Wall and Benjie Schwimmer decided to forma a partnership and
contributed the following assets:

Wall Schwimmer

Carrying Value Fair Value Carrying Value Fair Value

Building 1 680 000 2 000 000

Furniture 120 000 100 000

Equipment 150 000 200 000

Wall and Schwimmer agreed to assume the mortgage on the building amounting to P600T,
and that Schwimmer will invest cash to make his capital equal to 25% of the total equity.
Prepare the journal entries to record the formation of the partnership.
 Partnerships: Introduction and Formation

Daniel Baker, Eliana Girard and Chehon Wespi-Tschopp formed a partnership at the start of
the year, known as BGW and Co. Bakers statement of financial position before the
formation of the partnership is as follows:
 Partnerships: Introduction and Formation

Debit Credit

Cash 200 000

Accounts receivable 400 000

Allowance for doubtful accounts 40 000

Inventory 2 000 000

Prepaid insurance 100 000

Property, plant and equipment 2 500 000

Trademark 1 915 000

Accounts payable 200 000

Unearned revenue 775 000

Notes payable 100 000

Baker, capital 6 000 000

 Partnerships: Introduction and Formation

Other information:
1. Baker will have a 50% interest in the partnership equity.
2. Girard contributed office equipment that has a carrying value of P2.5M and a fair value of
P2M to the partnership.
3. Girard will invest additional cash to make her investment equal to 30% of the total
partnership capital
4. Wespi-Tschopp will contribute cash equal to his interest in BGW.
5. The accounts used by Baker will be used by the partnership.
 Partnerships: Introduction and Formation

Required:
1. Prepare the entries to record the partnership formation.
2. Prepare the partnerships initial statement of financial position.