There are three distinct ownership interests with a closely held company. There is an economic expectation, a right to manage the company and right to hold the ownership position as an asset.
The partnership agreement is a formal document that outlines the ‘who’, ‘what’, ‘where’, ‘when’ and ‘how’. Partnership agreements are customarily created under the Uniform Partnership Act within the legal boundaries (state) where the partnership resides. This section of the website covers multiple issues and clauses related to the partnership agreement. For those of you that don’t understand, the partnership form of entity existence is by far the most flexible of all ownership forms for a business. No other form of ownership has so much to offer as a partnership.
The average person may not realize this, but the most notable joint venture in existence today is the National Football League. It figuratively owns every Sunday in the fall of each year. It is an association of 32 clubs agreeing to compete with each other, i.e. engage in athletic entertainment. Each venturer is its own business entity; the league generates its own revenue stream (mostly TV rights) and shares these profits with its members equally.
There is multi-step process to establish a Limited Liability Company (LLC). You must first be recognized by the state of origin and then apply to the Internal Revenue Service to identify the particular tax entity arrangement. Both recognition processes have several steps involved. This article guides the entrepreneur through each of the steps to create a Limited Liability Company.
Every partnership consists of at least two or more partners. In many partnerships, there are dozens of partners. Each partner is classed into a particular group. There are Limited Partners, General (sometimes referred to as Operating) Partners and of course somebody who is in charge – the Managing Partner. Each of these classes of partners has some form of financial, fiduciary and appointed powers.
Those small businesses using partnership or S-Corporation formats issue Form K-1 to the respective owners. When income is assigned to the owner and there is no corresponding cash related to that income, then this income is referred to as ‘Phantom Income’. In effect, it is assigned income for tax purposes without the corresponding cash to pay the tax liability.
A ‘Capital Account’ is a term used in partnership and in limited liability company business formats. It refers to the individual balances in the equity section of the balance sheet. The basic formula for value is beginning balance plus contributed capital plus earnings from the current accounting period less any withdrawals
Each of us has our own built in dictionary for terms we hear in our business lives. I find it fascinating that the standard business term ‘Equity’ is interpreted differently within the business world. I often interpret the term using the Internal Revenue Service definition because my background is in taxation. Lawyers use this term to mean ownership and not necessarily financial driven. Bankers convert this term to capital and the associated relationships to debt.
There is a tremendous amount of information to convey to fully understand partnership agreements. This is the first in a series of articles related to partnership agreements. Throughout this series I will explain the various sections and issues a small business owner faces in creating a sound and fair agreement with a single or multiple partners.