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September 14, 2005
Liquidating a partnership
This week's installment of Accounting 456 is dealing with partnerships, and specifically, with what happens when one goes out of business: liquidation.
When Meg and I set up Kafalas.com as an LLC organized as a partnership, our lawyer told us to spell out who puts in how much capital (at least on paper -- on the company's books, if not in reality) and who gets how much of the profits. We've never really paid much attention to that, in practice -- when the company draws revenue, we take it out based on who did the work (of which there hasn't been much lately). But for an active business, it's important to spell out exactly what each partner's portion of the capital -- how much he or she invests -- is, and how much of the profits each is entitled to.
This can be especially important when the business reaches the end of its useful life -- especially if it goes bankrupt. The chapter we've been reading on liquidation spells out how you turn the company's assets (if they're worth anything) into cash, pay off the creditors, and distribute what's left over among the partners. Or, if there's nothing left over, how you hit up the partners for additional investment to cover the company's debts.
With Kafalas.com, this isn't much of an issue -- the only asset on the books is a Mac G3, which we got in 1998 and which is now (a) fully depreciated and (b) essentially a boat anchor, since it won't boot. But if you have a partnership where the partners have invested a lot of their own money and equipment in the business, you need to have everything spelled out in the papers you draw up when you form the business in the first place.
Which brings me back to some wisdom I got from my high-school business-ed teacher, Mr. Pawelski: "Never go to work for a friend. Never hire a friend. Never go into business with a friend. And if you do, GET EVERYTHING IN WRITING!"
Posted by Urbie at September 14, 2005 08:09 AM