Question

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:

I. Allocation of Profits

A. Explain how allocating the profits evenly between the partners would work. Consider the fairness to each of the partners in your response.

B. What would be the value of each partner's capital account at the end of the year, given that the profits were allocated evenly among the three?

Support your answer with quantitative data and an explanation of how you came to this conclusion.

C. Explain an alternative method of allocating the profits if 80% of the profits was given to the cash investor and the remaining amount was split

evenly between the other two partners.

D. What would be the value of each partner's capital account at the end of the year, given this alternative allocation method? Support your

answer with quantitative data and an explanation of how you came to this conclusion.

Answer 1

In the present case, there are three partners - Alan, Bob & Carol.Alan has only invested $ 1 million in cash in the business and has nothing to do with the regular day to day activities.Bob has some experience and responsible for day to day operation. As Alan is investing his money he must be expecting some return from his money therefore it will be appropriate to share profit with him and since he is not an active partner it will not be feasible to give him more than he might have earned by investing. Only Alan had invested money in the business but he is a silent partner and he did not take part in any of the business activities. Whereas Bob and carol both contributed in other than monetary terms . Allocation of Profit is Equally for all these Partners   Alal Bob Carol Total Profit 150000/- Distribute All Partners Equally =150000/3 =50,000