Partnership to Ltd co - quick double entry Q

How to get partnership capital accounts onto ltd co balance sheet

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I'm almost embarrased to ask this question as I know the answer must be simple, but my addled brain can't work it out....

I'm doing the accounts for my husband's family business, which turned from a partnership to a limited company last year. I cannot work out the double entry to put the 5 partners capital accounts onto the limited Co balance sheet. I assume that each partner will have some sort of new account in the liabilities section of the limited company, because the ltd co owes each partner the value of their accrued capital in the partnership?

All 5 partners became shareholders, but only 2 are directors

Is it:

Dr Reserves (share capital, one for each director?)

Cr Liabililies (directors account or capital account per partner, as each partner is owed by the ltd co to the value of their partnership capital input)

Feel free to tell me how obvious this is....

Replies (14)

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By WhichTyler
26th Apr 2020 11:12

If there isn't a shareholders agreement that explains who has contributed what, and if it can be repaid, or a sale & purchase agreement transferring the assets from partnership to ltd, there should be...

If there is, then that should get you started on how to treat the accounts...

Thanks (1)
By johngroganjga
26th Apr 2020 11:13

Some of the partnership assets introduced into the company are presumably in payment for the company’s share capital. So to that extent at least the credit entry in the company’s books is not to shareholders’ loans.

The debit entry by the way is not to reserves but the the relevant asset accounts in the top half of the balance sheet.

And yes, to the extent that assets introduced are not paying for share capital the credit entry is to loans from the shareholders / partners.

You don’t mention whether the partnership had any third party liabilities at the date of transfer. If it did, they did not become creditors of the company, and should not be accounted for as if they did.

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By johnhemming
26th Apr 2020 11:53

I think the difficulty is that there are at least two ways of doing this. If the business was "turned into" a limited company then the partners would get shares for that and otherwise not be owed anything. Alternatively if the business was created separately and bought the business off the partners (strictly not turning into a limited company, but a similar outcome) then the business would owe something for that transaction.

As whichTyler says the SAP should explain everything and the shareholders agreement should govern how things go from now.

One assumes the accountant that advised on how to do this transaction would be able to explain how to do this as well.

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Replying to johnhemming:
By johngroganjga
26th Apr 2020 12:15

johnhemming wrote:

As whichTyler says the SAP should explain everything and the shareholders agreement should govern how things go from now.

There will only be a sale agreement if the partners were conned by a solicitor into paying them a fat fee for providing one - for the obvious reason that the vendors and the purchasers are the same people. A shareholders’ agreement may well be advisable for the future, but it won’t help the OP with what the bookkeeping entries should be now.

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Replying to johngroganjga:
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By johnhemming
26th Apr 2020 20:55

There is, of course, an agreement. The agreement really should be documented in writing. As there are partnerS it is worth making sure it makes sense in some way.

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Replying to johnhemming:
By johngroganjga
27th Apr 2020 08:50

Why should it be documented in writing? What would be the point?

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Replying to johngroganjga:
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By southgirlaccountant
27th Apr 2020 08:24

No agreement - parents and their children. Parents pretty much retired to silent partners, children running the business.

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Replying to southgirlaccountant:
RLI
By lionofludesch
27th Apr 2020 08:51

southgirlaccountant wrote:

No agreement - parents and their children. Parents pretty much retired to silent partners, children running the business.


There must be an agreement. It may not be written. They need to speak to one another.

Ask questions. What is the value of the assets? Is there any goodwill? In what proportions are the assets held by the partners? How many shares are to be issued? If you don't get proper answers tell them you can't deal with the bookkeeping.

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Replying to lionofludesch:
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By southgirlaccountant
27th Apr 2020 09:16

I could do, but they're my immediate family! They'd all just chuckle if I threw a wobbly and said i wasn't doing their book-keeping! I know what the agreement in principle is, i just wasnt sure of the double entry, but I think i do understand it now from the answers given here :-)

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Replying to southgirlaccountant:
RLI
By lionofludesch
27th Apr 2020 09:30

They can chuckle as much as they like but if you've no numbers, the task is impossible.

Would they say "we made some sales today, but we're not telling you how much"?

Probably not.

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Replying to southgirlaccountant:
paddle steamer
By DJKL
27th Apr 2020 11:13

Do take a close look at any chargeable assets (possibly only goodwill) and checking if ownership of same within previous partnership matches proportionate share ownership in new limited post event; remember these are connected parties.

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RLI
By lionofludesch
26th Apr 2020 12:01

As implied above, the partners need to decide first what assets they're transferring to the company, then the value of those assets, then what their respective shares of the value are. it would be uncommon for all the assets to be transferred. Usually the old business collects its own debts and pays off its own creditors.

Debit the assets to new accounts in the company's books then credit the shares to loan accounts. It should balance at that point.

Then all you have to do is issue the shares and get them paid for, possibly out of the loan balances, possibly not. Whatever the shareholders decide.

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By Justin Bryant
27th Apr 2020 09:43

Isn't this just a case of simple double entry in the Ltd for the shares and/or cash/and or loans/IoUs issued by the company as consideration for the business' net asset market value (including any goodwill) and corresponding entries in the Ltd's B/S re the actual assets/liabilities transferred from the p-ship? The above consideration issued by the company will either be left in the p-ship or distributed to the partners in satisfaction of their capital & current accounts.

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By Ian Bee
27th Apr 2020 11:03

Can you tell us the nature of the business, also what assets were transferred, and what assets or liabilities would be left with the partnership.

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