2.2 Investments in Partnerships, Unincorporated Joint Ventures, and LLCs
ASC 323-10
15-5 The guidance in the Overall Subtopic does not apply to any of the following:
- An investment in a partnership or unincorporated joint venture (also called an undivided interest in ventures), see Subtopic 323-30
- An investment in a limited liability company that maintains specific ownership accounts for each investor as discussed in Subtopic 272-10.
ASC 323-30
25-1 Investors in unincorporated entities such as partnerships and other unincorporated joint ventures
generally shall account for their investments using the equity method of accounting by analogy to Subtopic
323-10 if the investor has the ability to exercise significant influence over the investee.
An investor should first consider ASC 810-10 to evaluate whether the investee
should be consolidated, regardless of its ownership percentage. (See Deloitte’s Consolidation
Roadmap to determine whether the guidance in ASC 810-10 applies to
the investment.) If an investor determines that the investee should not be
consolidated, the investor should consider the guidance in ASC 323-10 or other
guidance as appropriate.
Investments in partnerships (general or limited), unincorporated joint ventures,
and LLCs that maintain specific ownership accounts for each investor are excluded
from the scope of ASC 323-10. However, if an investor has the ability to exercise
significant influence over these types of investments, it generally should apply the
principles of accounting for equity method investments by analogy to ASC 323-10. In
addition, ASC 970-323 provides similar guidance relative to various forms of
investments in real estate development projects.1 However, the presumed level of ownership interest that allows an investor to
exercise significant influence over an investee for these types of entities differs
from the presumed levels of ownership for corporations. This topic is further
discussed in Section
3.2.
2.2.1 Limited Liability Companies
ASC 323-30
35-3 An investment in a limited liability company that maintains a specific ownership account for each
investor — similar to a partnership capital account structure — shall be viewed as similar to an investment
in a limited partnership for purposes of determining whether a noncontrolling investment in a limited
liability company shall be accounted for in accordance with the guidance in Topic 321 or the equity
method.
ASC 272-10
05-2 A limited liability company generally has the following characteristics:
- It is an unincorporated association of two or more persons.
- Its members have limited personal liability for the obligations or debts of the entity.
- It is classified as a partnership for federal income tax purposes.
05-3 Limited liability companies have characteristics of both corporations and partnerships but are dissimilar from both in certain respects. The following discussion compares characteristics typical of many limited liability company structures with characteristics of corporations or partnerships; however, those characteristics may not be present in all limited liability company structures.
05-4 Like a corporation, the members (that is, owners) of a limited liability company generally are not personally liable for the liabilities of the limited liability company. However, like a partnership, the members of [a] limited liability company — rather than the entity itself — are taxed on their respective shares of the limited liability company’s earnings. Unlike a limited partnership, it is generally not necessary for one owner (for example, the general partner in a limited partnership) to be liable for the liabilities of the limited liability company. Also, unlike a limited partnership in which the general partner manages the partnership, or a corporation in which the board of directors and its committees control the operations, owners may participate in the management of a limited liability company. Members may participate in a limited liability company’s management but generally do not forfeit the protection from personal liability afforded by the limited liability company structure. In contrast, the general partner of a limited partnership has control but also has unlimited liability, whereas the limited partners have limited liability like the members of a limited liability company. Additionally, all partners in a general partnership have unlimited liability. Like a partnership, financial interests in most limited liability companies may be assigned only with the consent of all of the limited liability company members. Like a partnership, most limited liability companies are dissolved by death, bankruptcy, or withdrawal of a member.
As stated in ASC 272-10-05-3, LLCs may “have characteristics of both
corporations and partnerships but are dissimilar from both in certain respects.” EITF Issue 03-16 discussed how LLCs were included in the scope of the guidance
and addressed the similarities and differences between LLCs and limited
partnerships. When assessing whether the investment in an LLC should be
accounted for under the equity method, an investor must first determine whether
the LLC is more akin to a corporation or a partnership. In making that
determination, the investor should consider whether the LLC maintains specific
ownership accounts for each investor. A specific ownership account is one in
which an individual investor’s capital transactions (e.g., contributions and
distributions) and share of LLC profits and losses are allocated in a manner
similar to the way they would be in a partnership capital account structure. The
manner in which an LLC is taxed is often an indicator of whether the LLC is
structured with separate capital accounts. If the LLC is taxed in a manner
similar to a partnership, specific ownership accounts are maintained for each
investor. However, if the LLC is taxed in a manner similar to a corporation,
equity is often indistinguishable among owners, and an investor’s interest in
such entities is similar to a common shareholder’s interest in a
corporation.
2.2.1.1 LLC That Maintains Specific Ownership Accounts
If an investor has an investment in an LLC that maintains specific ownership
accounts for each investor, the investment should be evaluated in the same
manner as one in a partnership (see Section 2.2.2). The same evaluation
would be performed for an investment in an entity other than a partnership
or LLC if that entity also maintains a specific ownership account structure
(such as a common trust fund).
See Section 3.2.3 for further discussion of the evaluation of significant influence over an investee that has the legal form of a partnership.
2.2.1.2 LLC That Does Not Maintain Specific Ownership Accounts
If an investor has an investment in an LLC that does not maintain specific ownership accounts for each
investor, the investment should be evaluated in the same manner as one in a corporation.
See Section 3.2.1 for further discussion of the evaluation of significant influence over an investee that
has the legal form of a corporation.
It should be noted that ASC 810-10 specifically requires an investor to consider multiple factors
when assessing whether the LLC more closely resembles a corporation or partnership. However, the
evaluation under ASC 323-10 considers only whether a specific ownership account structure exists.
2.2.2 Limited Partnership Interests in Partnerships and Similar Entities
ASC 970-323
25-6 The equity method of accounting for investments in general partnerships is generally appropriate for
accounting by limited partners for their investments in limited partnerships. A limited partner’s interest
may be so minor that the limited partner may have virtually no influence over partnership operating
and financial policies. Such a limited partner is, in substance, in the same position with respect to the
investment as an investor that owns a minor common stock interest in a corporation, and, accordingly, the
limited partner should account for its investment in accordance with Topic 321.
Investments in partnerships and similar entities (e.g., unincorporated joint ventures or LLCs that
maintain specific ownership accounts for each investor) are accounted for under the equity method
of accounting in accordance with ASC 970-323-25-6 unless the investor’s interest is “so minor that the
limited partner may have virtually no influence over partnership operating and financial policies.” While
the guidance in ASC 970-323 is specific to real estate partnerships, ASC 323-30-S99-1 clarifies the
SEC’s view that “investments in all limited partnerships should be accounted for pursuant to paragraph
970-323-25-6.” Therefore, we believe that it is appropriate for investors to apply this guidance to all
partnerships and similar entities (not only real estate investees).
See Section 3.2.3 for further discussion of the presumed levels of ownership that allow an investor in a
partnership or other similar entities to exercise significant influence.
2.2.3 General Partnership Interests in Partnerships
ASC 970-810
25-3 If a limited partnership does not meet the conditions in paragraph 810-10-15-14 and, therefore, is not a variable interest entity, limited partners shall evaluate whether they have a controlling financial interest according to paragraph 810-10-15-8A. The guidance in Subtopic 810-10 on consolidation shall be used to determine whether any limited partners control the limited partnership:
- If no single partner controls the limited partnership, the general and limited partners shall apply the equity method of accounting to their interests, except for instances when a limited partner’s interest is so minor that the limited partner may have virtually no influence over partnership operations and financial policies (see paragraph 323-30-S99-1).
- Subparagraph superseded by Accounting Standards Update No. 2015-02.
- If a single limited partner controls the limited partnership, that limited partner shall consolidate the limited partnership and apply the principles of accounting applicable for investments in subsidiaries in Topic 810.
If a partnership is not a variable interest entity (VIE) or if a partnership is a VIE but the general partner (GP) is not the primary beneficiary, the GP should account for its interest in the partnership under the equity method.
2.2.4 Corporate Joint Ventures
All joint venture investments in which an investor shares in joint control, whether they are incorporated or unincorporated, should be accounted for under the equity method without regard to the investor’s ownership percentage.
Footnotes
1
See ASC 970-323-25-3 through 25-8.