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Partners in large accounting firms can make over $250,000 per year, with top partners drawing over $800,000. However, consideration of those incomes should take into account the risks that partners take and the fact that the incomes of partners in small accounting firms are often much lower. Partners are not compensated in the same way as managers in corporations. Partner’s income is not guaranteed, but rather is based on the performance of the partnership. Also, each partner is required to make a substantial investment of capital in the partnership.
This capital remains at risk for as long as the partner chooses to stay in the partnership. For instance, in one notable case, when a large firm was convicted of destroying evidence in the Enron case, the partners lost their total investments as well as their income when their firm was subjected to lawsuits and other losses. The firm was eventually liquidated. Dissolution of a partnership occurs whenever there is a change in the original association of partners.
When a partnership is dissolved, the partners lose their authority to continue the business as a going concern.
The fact that the partners lose this authority does not necessarily mean that the business operation is ended or interrupted. However, it does mean—from a legal and accounting standpoint—that the separate entity ceases to exist. The remaining partners can act for the partnership in finishing the affairs of the business or in forming a new partnership that will be a new accounting entity. The dissolution of a partnership takes place through, among other events, the admission of a new partner, the withdrawal of a partner, or the death of a partner.
The admission of a new partner dissolves the old partnership because a new association has been formed. Dissolving the old partnership and creating a new one requires the consent of all the original partners and the ratification of a new partnership agreement. When a new partner is admitted, a new partnership agreement should be in place. An individual can be admitted to a partnership in one of two ways: by purchasing an interest in the partnership from one or more of the original partners or by investing assets in the partnership.
Purchasing an Interest from a Partner When a person purchases an interest in a partnership from an original partner; the transaction is a personal one between these two people. However, the interest purchased must be transferred from the Capital account of the selling partner to the Capital account of the new partner. Investing Assets in a Partnership When a new partner is admitted through an investment in the partnership, both the assets and the partners’ equity in the firm increase. The increase occurs because the assets the new partner invests become partnership assets, and as partnership assets increase, partners’ equity increases.
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