Services as Capital Contributions: Understanding Kovacik v. Reed

20 Pages Posted: 7 Dec 2007 Last revised: 27 Jan 2008

See all articles by Royce de Rohan Barondes

Royce de Rohan Barondes

University of Missouri-Columbia School of Law

Date Written: December 4, 2007


This essay examines the capital accounting of Kovacik v. Reed, leading authority addressing allocation of losses between a partner who contributed only property and another who contributed only services. Kovacik posits that such parties having agreed to share profits equally have implicitly agreed their contributions were of equal value. This essay shows that such an agreement would not produce the result Kovacik reaches. The Kovacik result is instead produced by the following implausible implicit agreement between the parties: The value of the services provided by the services partner to be treated as a capital contribution equals the amount the partnership loses on a cash basis. The more the firm ultimately loses, the more those services are agreed to be worth. Prior work by Bainbridge identifies a manifestation in this context of a problem referenced as overinvestment in the financial economics literature. This essay further demonstrates the Kovacik result can create a complementary underinvestment problem.

Keywords: Partnership, services partner, capital contribution, allocation of losses, underinvestment

JEL Classification: K20

Suggested Citation

Barondes, Royce de Rohan, Services as Capital Contributions: Understanding Kovacik v. Reed (December 4, 2007). Available at SSRN: or

Royce de Rohan Barondes (Contact Author)

University of Missouri-Columbia School of Law ( email )

Missouri Avenue & Conley Avenue
Columbia, MO MO 65211
United States
573-882-1109 (Phone)
573-882-4984 (Fax)


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