General Partnership Formation. CPA Exam REG

In this video, I explain the formation of general partnership as covered on the CPA exam.
Start your free trial👉https://lnkd.in/g4hZAp2

The formation of a general partnership is relatively straightforward and informal compared to other business structures. It essentially occurs when two or more individuals decide to engage together in a business for profit as co-owners. Here are some key points about forming a general partnership:

No Formal Documentation Required: Unlike corporations or limited liability companies, a general partnership doesn't require formal paperwork or agreements to be established. This means there's no need to draft specific partnership documents or articles of incorporation.

No State Filing Necessary: There's no requirement to file anything with state authorities to create a general partnership. This contrasts with corporations and LLCs, which usually must register with the state.

Express Agreement Not Essential: Partners do not need to have an explicit agreement to form a partnership. A partnership can be implied based on their conduct and how they operate the business. For instance, if two people start a business together and share profits, they might be considered to have formed a partnership, even if they haven't formally agreed to do so.

A joint venture and a general partnership are similar in many legal aspects, but there is a key distinction between the two, especially important for examination purposes:

Joint Venture:

A joint venture is typically formed for a specific purpose. This purpose is usually a single project or transaction, or a series of related projects or transactions.
The scope of a joint venture is more limited in terms of duration and objectives. Once the specific project or transaction is completed, the joint venture usually dissolves.
Joint ventures are common in situations where two or more parties want to collaborate on a particular business opportunity without integrating their entire businesses.
General Partnership:

In contrast, a general partnership is a broader agreement where two or more individuals agree to carry on a business for profit as co-owners.
Unlike a joint venture, a general partnership is not necessarily limited to a single project or transaction. It typically involves running a business with an indefinite duration and a variety of activities.
General partnerships can be formed without formal agreements and can even be implied from the conduct of the parties involved.
In summary, while both joint ventures and general partnerships involve collaboration between parties for business purposes, a joint venture is usually more focused and limited in scope, often created for a specific project or transaction, whereas a general partnership is broader and typically involves running an ongoing business.

When it's uncertain whether individuals intended to create a partnership, the key factor that often suggests a partnership was intended is the agreement to share profits. Here's a more detailed explanation:

Presumption of Partnership Through Profit Sharing:

If two or more individuals are involved in a business arrangement and it's not clear if they intended to form a partnership, the way they handle profits becomes crucial.
When these individuals have an agreement to share the profits from their business activities, it's typically presumed that they intended to establish a partnership.
This presumption is based on the idea that sharing profits is a characteristic activity of partners in a business. Partners usually contribute to the business and then share the resulting profits.
However, it's important to note that this is a presumption, not a definitive proof. Other factors might indicate a different type of business relationship. For example, if profit sharing is more akin to payment for an employee, a loan repayment, or a transaction between independent contractors, it might not indicate a partnership.

In summary, an agreement to share profits is a strong indicator that a partnership was intended, but it should be considered alongside other factors and the overall nature of the business relationship.






#cpaexaminindia #cpaexam #accountinglectures