Chapter 10
Partnerships: Formation,
Operation and Basis
Corporations, Partnerships,
Estates & Trusts
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1

The Big Picture (slide 1 of 3)
• For 15 years, Maria has owned and operated a seaside bakery and cafe´ called The Beachsider.
– Maria would like to expand and has talked to her landlord,
Kyle about it.

• The Beachsider is one of several older buildings on 3 acres of a 10-acre parcel that Kyle’s family has owned for years.
– The remaining 7 acres are undeveloped.

• Kyle and Maria talked to Josh, a real estate developer, and he proposed an expansion to The Beachsider and upgrades to the other buildings.

The Big Picture (slide 2 of 3)
• The parties agreed to form a partnership to own and operate The Beachsider and to improve and lease the other buildings.
• Under the plan, Kyle and Maria will each contribute
½ of the capital needed.
– Kyle’s real estate is valued at about $2 million.
– Maria’s bakery equipment and the cafe´ furnishings are valued at about $500,000.
– The improvements will cost about $1.5 million, which
Maria has agreed to contribute to the partnership.

The Big Picture (slide 3 of 3)
• Josh will not contribute any capital to the partnership.
– Instead, he will manage the construction and the operation of the partnership in exchange for 5% of the capital and
20% of the ongoing profits.
– His capital interest is valued at $200,000.

• What are the tax consequences if the trio forms
Beachside Properties as a partnership to own and operate the shopping center?
– What issues might arise later in the life of the entity?

• Read the chapter and formulate your response.

Partnership Definition
• An association of two or more persons to carry on a trade or business
– Contribute money, property, labor
– Expect to share in profit and losses

• For tax purposes, includes:
–
–
–
–

Syndicate
Group
Pool
Joint venture, etc

Entities Taxed as Partnerships
(slide 1 of 4)

• General partnership
– Consists of at least 2 general partners
– Partners are jointly and severally liable
• Creditors can collect from both partnership and partners’ personal assets
• General partner’s assets are at risk for malpractice of other partners even though not personally involved

Entities Taxed as Partnerships
(slide 2 of 4)

• Limited liability company (LLC)
– Combines the corporate benefit of limited liability with benefits of partnership taxation
• Unlike corporations, income is subject to tax only once
• Special allocations of income, losses, and cash flow are available – Owners are “members,” not partners, but if properly structured will receive partnership tax treatment Entities Taxed as Partnerships
(slide 3 of 4)

• Limited partnership
– Has at least one general partner
• One or more limited partners

– Only general partner(s) are personally liable to creditors • Limited partners’ loss is limited to equity investment

Entities Taxed as Partnerships
(slide 4 of 4)

• Limited liability partnership (LLP)
– An LLP partner is not personally liable for malpractice committed by other partners
– Popular organizational form for large accounting firms • Limited liability limited partnership (LLLP)
– An extension of the limited partnership form
– All partners, whether general or limited, are accorded limited liability

The Big Picture – Example 1

Types Of Partnerships (slide 1 of 2)
• Return to the facts of The Big Picture on p. 10-1.

• When Beachside Properties is formed, Kyle, Maria, and Josh must decide which type of partnership to utilize. – With a general partnership, Kyle, Maria, and Josh would each be jointly and severally liable for all entity debts.
– With a limited partnership, one of the partners would be designated as a general partner and would be liable for all entity debts.
– Because all 3 partners want to have limited liability, they decide not to use a general or