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Limited partnership may have some limited partners and other general members (must have at least one of each). Name of company must include phrase “limited partnership”. Limited partnership required formal registration (filing) with the state; creation of certificate of limited partnership. Liability of limited partners is limited to their capital contribution amount.

The general partners usually manage the partnership while limited partners invest capital in the business. In addition, general or limited partner contribution could be cash, services performed or property (or promise to perform service, give notes,).

Profit and loss sharing are based on the certificate of agreement form of the business. For limited partners, losses (as well as liability) are limited to their capital contribution. If there is no loss/ profit sharing agreement exist, shared based on % of capital contributions.

Limited Liability Partnership: Characteristics and Advantages:

This new form of business allow professionals who want to do business as professionals in a partnership, but still pass through tax benefits while limiting their (the partners) personal liability. LLP is very common business structure among law and accounting firm. How to form a limited liability partnership (LLP): Company must file article of LLP with the secretary of state, as well as to include phrase of limited liability partnership in the company’s name to notify public. States may require approval of majority partners to become LLP.  The laws of the state in which the partnership formed govern affairs of the company business conduct in all other states.

Disadvantages:

As in general partnership, general partners in LLP have unlimited liability for the business. However, states allow LLP to be formed so there is no general partner, where each member act as limited partner with the following guidance:

1. Specific amount of liability malpractice insurance is required.
2. Partners remain fully liable for their own negligence or wrongful acts of those in the LLP they supervise of have control over.
3. Limit to partners’ liability – when more than one partner is liable for negligence, liability is often proportioned.

Advantages:

1. Taxes pass through.
2. Limited liability for partners.
3. Partners avoid personal liability for mistakes or malpractice of other partners.

Limited liability company (LLC) is a relatively new form of business; All members have limited liability and therefore no personal liability. Advantages include:

1. Considered a separate legal entity.
2. Not considered  a corporation; members’ ability is limited to their contribution+ Equity
3. Don’t have to follow formality in conducting business, such as keeping minutes.
4. Some states allows Sole Proprietorship to  be formed into LLC to obtain its advantages.

Characteristics of LLC: Must be formed according to the limited liability company statue of the state in which it formed.  LLC considered foreign LLC in other states in which it does business – and thus must register with Secretary of State before doing business in another state or cannot sue in state courts. Most state requires that the limited liability company’s name include a phrase or initials of LLC, (to give notice for public).

Business formation: To form a limited liability company, members must file Articles of Organization with Secretary of State. Member of LLC has no interest in specific property in LLC but has interest in the LLC in general. Member has general management interest: include rights to manage affairs of firm, vote within firm, and get information about the company. Unless agreed otherwise, each member has equal voice in management.

Business termination: The LLC can be dissolved when:

1. All  members agree in writing to dissolve
2. Time period passes or event happens as specified in the company’s operating agreement.
3. Member withdraws, is voted out, dies, goes bankrupt, or become incompetent (most states allow remainder of members to continue LLC if agreed upon unanimously)
4. Company dissolved a court order.

Withdraw profit/ loss from a limited liability company: Member has right to distribution according to profit and loss sharing agreed upon in operating agreement. Unless agreed otherwise, members divide loss and profit equally (according to Uniform Limited Liability Company Act).

General Partnership definition: an association of two or more persons who agree to carry on as co-owners of an ongoing business for profit. Filing is not required. General partnership must consist of at least two owners. Members are personally liable for all obligations of the business. A partnership may be dissolved after a partner dies or otherwise dissociates from the partnership unless the partners have agreed otherwise, or vote to continue the partnership. Taxes flow through the partnership to the partners and taxed at their rates. A partner cannot transfer his partnership interest without unanimous consent of the other partners. Also, general partnership may file for bankruptcy as a separate entity.

In a general partnership:

1. All partners are general partners
2. All partners share equally in mgmt, profits and losses unless agreed otherwise (even when contributions are not equal)
3. Within the ordinary course of business a majority vote is needed.
4. Matters outside the ordinary course of business require unanimous consent

Formation: Intent to form a partnership (either Express, orally or in writing, or Implied, in conduct) is the key to general partnership formation. No express agreement is necessary. An agreement can be implied from conduct showing intent to enter into a business for profit together. However, if the P/S wants to exist for mare than a year, an agreement is required under the statue of frauds.

Notes: CPA / CFA blogspot. Edit by Oren Gulasa

Debt Service Coverage Ratio (DSCR) definition: The ratio of cash available for debt servicing to interest, principal and lease payments. In corporate finance, DSCR refers to the amount of cash flow available to meet annual interest and principal payments on debt, including sinking fund payments. Most commercial banks require 1.15 – 1.35 times ratio to ensure cash flow sufficient to cover loan.

DSCR Formula: Net Operating Income / Total Debit Service

Fixed Charge Covenant definition: Use as a measured of debt ratio, the fixed charge coverage ratio indicate the company’s ability to satisfy fixed financing expenses, such as interest and leases. Commercial banks usually require businesses to maintain fixed charge coverage ratio of not less then 1.20 to 1.00. EBIT= Earning before interest and taxes; Net operating income Fixed charge = Expense+ Rent Exp+ current portion of LTD + Capital expenditure).Fixed Charge Covenant

Formula: (Net Operating Income + Fixed Charge) / (Interest + Fixed charge)

Liabilities to Net Worth Covenant: This ratio measure the company’s ability to cover its liabilities. It reflects the extent to which a company’s net worth (the value of its tangible assets) can offset the total liabilities. Formula: Total Liabilities / (Equity – Total Liabilities). In this ratio, we deduct intangible assets from the total assets.

The balance between debt and Equity: Capital structure refers to the relative proportions of a company’s different funding sources, which include debt, equity and hybrid instruments such as convertible bonds. A simple measure of capital structure is the ratio of long-term debt to total equity. Long term liabilities defined as loans that are given for a period greater then one year.
According to Harper (2009) since the cost of equity is not explicitly displayed on the income statement, whereas the cost of debt (interest expense) is itemized, it is easy to forget that debt is a cheaper source of funding for the company than equity. Debt is cheaper because 1. Creditors have a prior claim if the company goes bankrupt, debt is safer than equity and therefore warrants investors a lower return; for the company, this translates into an interest rate that is lower than the expected total shareholder return (TSR) on equity. 2. The interest paid is tax deductible, and therefore, lower tax bill would increase the net cash for the company.

By: Oren Gulasa