Question

"Bill and Ted form a partnership with cash contributions of $40,000 each. Bill is a limited partner. Under the partnership agreement, Bill and Ted share all partnership profits and losses equally. The partnership borrows $100,000 from a local bank to purchase depreciable equipment to be used in the partnership's business. Ted is required under the partnership agreement to pay the creditor if the partnership defaults. Based upon these facts, what are Bill's and Ted's bases in the partnership?"

Answer 1

Answer:

Bill and Ted's basis in the partnership are as follows;

Ted $140,000

Bill $40,000

Explanation:

A limited partner is a partner who contribute cash only, does not partake in the running of the business hence has limited liability. In other words, he tends to lose his investment only in the partnership business should it default . Since Tim is a limited partner, his basis in the partnership business will be the $40,000 only that he contributed in the formation of the business.

Since Ted is required under the partnership agreement to pay the creditors if the partnership defaults, that makes him a general partner. A general partner is a partner who takes responsibility for the actions of the business, meaning that he controls the affairs of the business and has unlimited liability. Therefore, his basis in the partnership business will be $140,000. This is gotten by adding up his cash contribution of $40,000 and $100,000 loan from the bank, hence liable to pay back the loan should the partnership business fails to meet up with it's obligations.