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Services as Capital Contributions: Understanding Kovacik v. Reed

Royce de Rohan Barondes

University of Missouri-Columbia School of Law

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.

Number of Pages in PDF File: 20

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

JEL Classification: K20

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Date posted: December 7, 2007 ; Last revised: January 27, 2008

Suggested Citation

Barondes, Royce de Rohan, Services as Capital Contributions: Understanding Kovacik v. Reed (December 4, 2007). Available at SSRN: https://ssrn.com/abstract=1056921 or http://dx.doi.org/10.2139/ssrn.1056921

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Royce De Rohan Barondes (Contact Author)
University of Missouri-Columbia School of Law ( email )
Missouri Avenue & Conley Avenue
Columbia, MO 65211
United States
573-882-1109 (Phone)
573-882-4984 (Fax)
HOME PAGE: http://www.missouri-k.com

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