Topic 5 - Converting Partnership To Company

Conversion of a Partnership
to a Limited Company
Peter D. Mshana
Assistant Lecturer
Tanzania Institute of Accountancy
Thursday, January 30, 2020 Investment Accounts - Peter Mshana 1
To be Covered
1. Introduction
2. Difference between Partnership and a
company
3. Reasons for converting partnership
into a limited company
4. Accounting treatments for conversion
of partnership to a company
5. Books of a new company

Introduction
A business can take either of the following three
forms
Sole proprietorship
Partnership
Company

Partnership
Registered partnership
Registration is not compulsory
Unlimited liability of partners
Owners are the managing partners unless
otherwise as stated in the deed
Partners are eligible for remuneration and
interest subject to the terms of deed
Business profits can be withdrawn which
are tax exempted
Company
A private limited or Public limited company
Company registered under Companies Act
2002 Either
Limited by guarantee
Limited by shares
Separation of ownership from the
management
Management will declare operations to the
owners on annual basis

Company
Management and owners are bound by the
articles and memorandum of company
Company is bound to pay income tax either on
straight basis or MAT ( minimum alternative
tax)
Profit declarations are once again subject to
the dividend distribution tax in the hands of
the company
Further whole of the profit cannot be
withdrawn.
Difference between Partnership
and a company
The major difference between companies
and partnerships may be considered under
the following:
Formation: A company is created by
registration under the Companies Act. A
partnership is created by agreement which
may be express or implied from the conduct
of the partners.
No special form is required, though
partnerships agreement are usually written
Difference between
Partnership and a company
Status At Law: A company is an artificial
legal person with perpetual succession.
Thus a company may purchase property ,
make contracts and sue and be sued. It is
an entity distinct from its members.
A partnership is not a legal person
though it may sue and be sued in the
firm’s name. Thus the partners own the
property of the firm and are liable for the
contracts of the firm.
Difference between
Number Of Members: A private company
must have at least two members and
maximum 50 members.
A partnership cannot consist of more than
20 persons (10 persons in case of banking
business).
Liability Of Members: The liability of a
member of a company may be limited by
shares or by guarantee.
The liability of a partner is unlimited
Variable Interest bearing
securities
Management: Members of a company
are not entitled to take part in the
management of the company unless they
become directors.
Partners are entitled to share in the
management of the firm unless the
articles provide otherwise.

Difference between
Agency: A member of a company is not
an agent of the company or that of
other members, and he cannot bind a
company by his acts.
Each partner is an agent of the firm and
his partners, and nay bind the firm by
his acts.

Difference between
Powers: The affairs of accompany are closely
controlled by the Companies Act, 2002 and the
company can only operate within the objects
laid down in the memorandum of association,
though these can be altered to some extent by
special resolution.
Partners may carry on any business as they
please so long as it is not illegal and make
whatever arrangements they wish with regard
to the running of the firm from time to time.

Difference between
Termination: No one member of a company
can wind up the company, and the death,
bankruptcy or insanity of a member does
not mean that the company must be wound
up.
A partnership may be dissolved by any
partner at any time unless the partnership is
entered into for a fixed period of time. A
partnership is also dissolved by the death or
bankruptcy of a partner.
Reasons for converting partnership
Liability Status
In a partnership, the partners have unlimited
liability for debts. In a private limited company,
the liability of the members (shareholders) is
limited to the amount they have paid for their
shares.
Tax advantages
The profits of a partnership are taxed on the
profits taken out by the partners. They are taxed
as individuals. A company pays corporation tax
and dividends may be a tax efficient way of
distributing profits.
Reasons for converting partnership
Exit Route
A limited company structure also allows an easier
'exit' route - shares can be sold to new owners
quite easily.
Management
In terms of management, it can be easier to
manage a company. A partnership can often be
difficult to manage - everyone can want a say.
Going Concern
The business will continue even if one of the
owners dies. In this case, shares will be transferred
to another owner
Accounting treatments
A partnership firm can converts itself
into a joint stock limited company or
sells its business to an existing one.
When that happen, Realisation
Account will be opened and assets
transferred to it, so also liabilities.

Whatever the company pays as
consideration will be credited to the
Realisation Account.
If expenses are incurred by the firm,
the amount will be debited to the

If the creditors are taken over by the
company, no further treatment is
necessary beyond transferring them
to the credit of Realisation Account.
However, if creditors are to be paid
by the firm, the actual amount paid
to them will be debited to
The profit or’ loss on Realisation will
be transferred to the capital
accounts according to partner’s
profit-sharing ratio.
The company takes over all the
assets including cash.

Therefore, cash should also be
transferred to Realization Account.
However, if the company does not
take over cash, it will not be
transferred.
The company will discharge the
amount due from it in the form of
cash, debentures and shares.
Journal Entries
Transfer assets to the realization account
Realization Account XXXX
Relevant Assets Account XXXX
To transfer Liabilities to Realization Account
Relevant Liability Account XXXX

Journal Entries
To Record Realization Expenses paid
Bank Account XXXX
To Record Liabilities payment made by partnership
Bank Account XXXX

Journal Entries
To Record cash received on Realization
Bank Account XXXX
When there is Realization Profit
Partner’s Capital Account XXXX

Journal Entries
When there is Realization Loss
To close Partnership books of account
Bank Account XXXX

Consideration Other than Cash
Separate accounts will, of course, be
opened for debentures and shares
received when consideration is paid in
term of Shares or Debentures.
Partners will divide the debentures and
shares among themselves, in the absence
of an express agreement, in the ratio of
their final claims, that is to say, in the ratio
of capitals standing after the loss or profit
on realization and other reserves and
profits have been transferred.
Journal Entries
When receiving the Shares or Debentures
Shares in a Company XXXX
To divide Shares or Debentures

Share in a Company XXXX

Class Example
Kay and Lee were in partnership, sharing proﬁts
and losses in the ratio 2:1 respectively. The
following was their balance sheet as at 31
December 2014.

Kay and Lee Balance Sheet as at 31 December 2014
Fixed assets
Buildings 300,000
Motor vehicles 150,000
450,000
Current assets
Stock 80,000
Debtors 60,000
Bank 10,000
150,000
Current liabilities
Creditors 50,000 100,000
550,000
Capitals:
Kay 320,000
Lee 160,000 480,000
Current accounts:
Kay 30,000
Lee 40,000 70,000
550,000
Class Example
On 1 January 2015, Cayley Ltd took over the
assets, other than bank. The purchase price
is £800,000, payable by £600,000 in £1
shares in Cayley Ltd at par, plus £200,000
cash. Kay and Lee will pay off their own
creditors. Shares are to be divided between
the partners in their proﬁt-sharing ratio.

Any Question???
We are still on our Journey, Lets make sure we all get there!!!
Thursday, January 30, 2020 Intermediate Financial Accounting- Peter Mshana 33

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Conversion of a Partnership

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Transfer assets to the realization account

Realization Account XXXX

Relevant Assets Account XXXX

To transfer Liabilities to Realization Account

Relevant Liability Account XXXX

Realization Account XXXX

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To Record Realization Expenses paid

Realization Account XXXX

Bank Account XXXX

To Record Liabilities payment made by partnership

Realization Account XXXX

Bank Account XXXX

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To Record cash received on Realization

Bank Account XXXX

Realization Account XXXX

When there is Realization Profit

Realization Account XXXX

Partner’s Capital Account XXXX

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When there is Realization Loss

Partner’s Capital Account XXXX

Realization Account XXXX

To close Partnership books of account

Partner’s Capital Account XXXX

Bank Account XXXX

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When receiving the Shares or Debentures

Shares in a Company XXXX

Realization Account XXXX

To divide Shares or Debentures

Share in a Company XXXX

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