Assume that John, James, and Jane are considering creating a legal business enti

Question

Assume that John, James, and Jane are considering creating a legal business entity to develop and market their idea for a web application. Recommend the most appropriate type of business activity (i.e., a general partnership, a limited liability partnership, or a limited liability company) for them to form. Provide a rationale for your response.

Determine the main purpose of a statement of realization and liquidation, and discuss the major information that the primary parties can gain from a statement of realization and liquidation in order to grasp the major events of the liquidation process. Next, suggest the most critical information to disseminate to the partners and creditors during liquidation. Justify your response.

Explanation / Answer

General partnership 1 Ease of creation 2 Low cost of operation 3 Few ongoing requirements limited partnership 1 Unlimited liability for general partners only 2 Limited partners are not involved in management. 3 Short-term projects/ventures limited liability partnership 1 Professional service businesses 2 Personal asset protection General partnerships, limited partnerships and limited liability partnerships are all taxed the same. No tax is paid by the partnership. Form 1065 is filed with the IRS, as well as a Schedule K for each owner. The Schedule K lists the owner’s share of the partnership’s income, expenses Keep in mind that general partnerships offer no liability protection to the owners. The owners are legally considered the same as the business, and personal assets can therefore be considered business assets. Additionally, partners in a general partnership bear responsibility for the actions of the other partners. General partnerships are undoubtedly the easiest to create and have the lowest ongoing costs, but they also provide the highest risk to the partners Statement of Partnership Realization and Liquidation 1 To guide and summarize the partnership liquidation process, a statement of partnership realization and liquidation may be prepared 2 The statement, often called a “statement of liquidation,” presents the effects of the liquidation on the balance sheet accounts of the partnership 3 Stated otherwise, the statement shows the conversion of assets into cash, the payment of liabilities, allocation of any gains or losses to the partners, and the distribution of cash to creditors and partner LIQUIDATIONS: 1.1 A lump-sum liquidation of a partnership is one in which all the assets are converted into cash within a very short time, creditors are paid, and a single, lump-sum payment is made to the partners for their capital interests. 1.2 Admittedly, most partnership liquidations take place over an extended period. EXPENSES ON LIQUIDATION 1 The liquidation process usually begins with scheduling the partnership’s known assets and liabilities 2 The liquidation process also involves some expenses, such as additional legal and accounting costs as well as “liquidation sale” advertisements. 3 These expenses are allocated to partners’ capital accounts in the profit and loss distribution ratio.

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