Question

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Compose a memo addressing the allocation of profits to three partners of a new business: Alan, Bob, and Carol. It is your responsibility to address the potential ways in which the first-year profits can be divided among these partners, including whether the partners should be taking a salary, how the partners' capital accounts may be affected by various decisions, and the most ethical way that the profits could be divided.

Your memo should answer the following prompt: A new business client comes to your office. There are three owners of the business. The three individuals, Alan, Bob, and Carol, are thinking about forming a partnership. Alan is only investing $1 million in cash. He will not have anything to do with the daily activities of the business. Bob has had some experience in the business and will be responsible for the day-to-day operations of the business. Carol has a great deal of experience and many contacts within the business. She will be responsible for attracting new clients. Neither Bob nor Carol are investing cash into the partnership. During the first year of operation, the partnership generated a profit of $150,000. None of the partners received distributions during the year.

Specifically, the following critical elements must be addressed:

Payment of Salary

A. Should the two partners who are working in the business receive a salary? Why or why not? Be sure to support your decision with research and

quantitative data.

B. If the two non-investors did receive a salary, how would their capital account be affected? How would this impact a potential future liquidation

or buyout? Be sure to thoroughly explain and support your answer.

C. Should the cash investor receive a higher share of the profits or other sharing options? Why or why not? Support your opinions with research

and quantitative data.

not clear

Answer 1

Solution 1.

The Two partners who are working in the Business shall receive monthly salary. The reason being that both of them are involved in the day to day activities of the business even though have not contributed any cash in to the business but would be actively involved in growing up the business. Therefore they should be paid monthly salary based on the current industry standard for their contribution

Solution 2.

If the two non investor did not receive the salary, then the distribution of Profit would depend on whether the investing Partner receives any interest on his investment. If the Investing partner receives any interest then the other two non investing partners should get higher share of profit or else the profit can be divided equally among the three. Similarly their capital account will get affected based on the above decision. In case of Liquidation or buyout first the outside liabilities are settled and if there is any assets left then first the capital is distributed and if still there is some assets remaining that asset will be distributed among all the partners.

Solution 3.

According to me, the cash investor should be given interest for his share of Investment and the other two partners involve in the day to day activity of business should be given the salary and the Profit should be distributed among the partners equally. In this way there would be a fair distribution of firms wealth and there will be less chances of conflict between the partners as the non investing partners will have an opinion that their contribution to the firm in the form of daily involvement has not be recognized and more focus has been given to the one who has brought the cash into the business. Because contribution from all the three partners are important for the working of the firm no one can say that he has only contributed towards the working and success.

MEMORANDUM

To : All Partners

Subject: Allocation of Profit

Terms:

Bob shall be responsible for the day to day activities of the Partnership firm. Carol shall be responsible for attracting new clients

Salary Payment:

Bob and Carol shall be paid monthly salary based on the current industry standards for their daily contribution to the Business

Interest Payment

Alon being the only Investor will be entitled for interest based on market rate

Profit sharing:

Any Profit or Loss remaining after deduction of Partners salary and Interest shall be distributed among the partners equally

Signatures of partners Date