Accounting for Partnership Business free essay sample

Through the comparison of the different business structures, Christina and David will choose the partnership as the form of business entity to commerce their new business. This report will discuss the reasons of choosing the partnership and then point out the advantages and disadvantages of different business structures. It will also explain the registration process and agencies that are involved in the form of partnership entity. Finally, based on the partnership agreement, some implications and financial reports will be given in the report. Sole trader The three main options are sole trader, partnership and company. Each has advantages and disadvantages, depending on various circumstances. Running a new business as a sole trader is the easiest approach, since getting started costs very little and is simple. The sole trader does not pay separate income tax and is not subject to company regulation such as the Corporations Act (Birt, Chalmers, Byrne, Brooks amp; Oliver, 2012). Also, the owner can retain full control, have rights to make decisions and get all the profits, if the business underperforms, he can offset losses against other income. However, the individual has unlimited liability since it is not a separate legal entity. That is to say, the owner is personally responsible for all the debts incurred by the business. If it goes bad, he may be forced to sell other assets and the personal assets could be at risk. The tax disadvantage is that a person may be liable to pay income tax up to the top marginal tax rate (Pendieton amp; Vickery, 2005). Moreover, this form is limited by skill, time and investment of the individual owner (Harris, Hargovan amp; Adams, 2009). Partnership Partnership, as a form of business structure, involves a group of two or more people carrying on the business in common with a view to profit (Harris, Hargovan amp; Adams, 2009). The partners will share the profits, losses and risks based on the ownership structures described in the partnership agreement (Birt et al. , 2012). The use of partnerships and its attractions can be attributed to several reasons. First and foremost, as is the case with sole trader, partnership is easy to set up with minimal costs and resources. Individuals are not required to prepare additional paperwork to form an ordinary partnership (Harris, Hargovan amp; Adams, 2009). However, they must fulfill the same registration requirements as other new business. Meanwhile, as with sole traders, although many partnerships use MYOB or QuickBooks to assist in report preparation, there are no formal requirements for partnership financial statements on the basis of accounting standards (Birt et al. , 2012). In other words, there is not bound by accounting standards and it is easy to create without many formalities due to lighter government regulation compared to companies. In the second place, the partnership does not pay separate taxation on the income and profits they earned and has the ability to split tax and share the responsibility for running the business. Although the partnership will present an annual partnership income tax return to the Australian Taxation Office (ATO) in order to maintain the partnership’s income and deductions for the period, they do not need to obey as much government regulation as companies (Birt et al. , 2012). Furthermore, the pooling of capital and resources is a plus as is the simplicity and tax arrangement (Harris, Hargovan amp; Adams, 2009). It means that this structure can combine the capital, skills as well as the talents, which will promote the efficiency of decision-making (Kimmel, 2008). But each partner takes on unlimited liability for the businesss debts and there is also the risk of dysfunctional disagreements among the partners (Pendieton amp; Vickery, 2005). Company With the company option, it is a form of business organization and separate entity from its directors and members. One of the advantages is the ownership flexibility, shareholders being able to come and go without unduly affecting the business. At the same time, the limited liability of shareholders leads to the transference of the ownership rights for shareholders (Pendieton amp; Vickery, 2005). Other advantages include that it is easy to raise capital through public share offerings and expand the business networks effectively due to legal structure (Birt et al. , 2012). Nevertheless, it is expensive and time consuming to set up. Complying with Corporations Act and other legal requirements, different types of companies need to prepare the financial reports based on accounting standards as well as conduct the complicated operational procedure like shareholder meetings or cultural management. While company taxation rates may be lower than some individual tax rates, tax losses are not passed through to the members because of its separate legal entity (Seidman, 1950). Therefore, the distinctive features of the partnership structure overweigh its disadvantages. The comparisons between the sole trader, partnership and company also show that the partnership is an appropriate choice for Christina and David’s small business. It is common in the fields of law and accounting. There are four essential elements for partnership: there must be a valid agreement between the parties ensuring the relationship; there must be a business being carrying on in accordance with Partnership Act; there must be two or more persons working in the business together although there may be silent partners who are not actively involved in the management; there must be a motivation to run the business so as to generate a profit, even if business is ultimately unsuccessful in making a profit (Pendieton amp; Vickery, 2005). The carrying on of a business may include a continuing activity over a period of time. Accordingly Christina and David can fulfill the above conditions and choose the partnership to conduct their business. Registration Process To conduct their business in a better way, registration processes and relative agencies involved in the formation of the partnership should be taken into account. To begin with, the basic registration requirements consists of applying for and Australian Business Number (ABN), which is an identifying number for dealing with the ATO and other government departments (Birt et al. 2012). Similarly, the partnership business need to register a unique number to increase the efficiency in administering tax called tax file number (TFN). The next step is that Christina and David need to elect to use a business name Camp;D tax agents for trading purpose. The business name is administered by the Australian Securities and Investments Commission (ASIC). This information is he ld in a public registry under the state or territory Business Name Registration Act 2011 (Harris, Hargovan amp; Adams, 2009). It details the identities of persons conducting the business and is useful for creditors. By accessing the information, creditors can ascertain who is operating the business. Another main registration requirement is the partnership agreement between two or more parties to enter into a legally binding relationship. The creation of partnership is essentially contractual in nature and the rules applicable to the formation of a contract must be followed for the partnership to have validity (Kimmel, 2008). If there is no partnership agreement, then the law assumes that all profits and losses will be shared equally between the partners. In this case, Christina and David decide to have a formal written partnership agreement because it clarify each partners roles, responsibilities, assets and liabilities and reduces the likelihood of disputes. An agreement can also cover what happens if the structure is dissolved or changed, for example, through the retirement or death of one of the partners (Pendieton amp; Vickery, 2005). Written agreement also needs to cover including the name of partnership, the role and authority of each partner, proportion of ownership of each partner, the manner of dissolution, the distribution of assets on dissolution and the resolution of disputes (Birt et al. , 2012). According to contribution of cash from Christina and David, which are $80,000 and $30,500 separately, Christina should be entitled to 73%, a greater share than David who accounts for 27% of the profits and losses. The salary of Christina and David is $5,600 each er month and are paid by fortnight. In terms of taxation, a partnership has its own TFN and lodges its own separate tax return with ATO (Birt et al. , 2012). In other words, although the partnership does not pay tax, individuals need to lodge an annual partnership income tax return on behalf of the business to show the total income earned and deductions claimed by the business. The tax return also shows each partners share of net partnership income as set out in the partnership agreement. Each partner includes their share on the individual tax return. As a partner, you must pay tax on your share of the partnership income you earn. Under a partnership, each partner is personally liable for the tax debts of the partnership. As a member of the partnership, youre responsible for your own super arrangements as youre not an employee of the business. You may be able to claim a deduction for any personal super contributions you make, and the partnership must make super contributions for any eligible workers they employ (Seidman, 1950). Lastly, individual partner is responsible for paying tax on the business income. Taking their partnership reports into account, there is no bound by accounting standards or company regulation, thus there is no guideline to follow when producing financial reports. Meanwhile, it is flexible in how they report on their financial position and financial performance (Kimmel, 2008). Financial Report On 1 July 2012, Christina and David established a partnership business structure named Camp;D tax agent, specializing in tax return service for customers. Christina and David managed the business themselves and hired Paula as an assistant. According to the written partnership agreement, they are liable for the debts and Christina is entitled to 72%, David is entitled to 27% of the profits and losses. The salary of Christina and David is $5,600 each per month. The main income comes from a contract with XYZ Ltd and tax return service for clients. To ensure the efficiency of the operation, they purchased a Bamp;W computer and signed a three-year lease on a BMW. Besides, the business expenses include rents, stationery, bills, advertising fees and so on. Now Camp;D tax agent has been operated for one month, the following transactions have occurred. Hence a worksheet is prepared as follows (Figure 1). Figure 1 Worksheet Figure 1 Worksheet The income statement reflects the success of the partnership in generating profits from its available resources during period ending 31 July 2012 using accrual accounting and also assesses the profitability of an entity throughout the life of the partnership (Birt et al. , 2012). In order to reflect the profits ability of Camp;D tax agent, the income statement is presented in Figure 2. Camp;D Tax Agent| Income Statement for period ending 31 July 2012| Income| | $| $| ?| Revenue| 29,595 | ? | Total income | | | 29,595 |