Question

Describe one important criterion that you should consider when deciding if you should join or establish a business partnership. Secondly, outline a significant factor that should be considered by partners when determining an income ratio.

Answer 1

A business of two or more partners having shares in capital investment, profit and losses, and liabilities, is known as partnership business.

Criterion: The most important is “opportunity cost”; this is the next-best benefit foregone because of joining into the partnership business; suppose the amount of capital investment in partnership is $30,000; if it is invested in other project then the return would be at 10%, ($30,000 × 10% = $3,000); therefore, the amount ($3,000) becomes opportunity cost that is foregone; if the partnership business gives return more than $3,000, then only joining in partnership should be accepted and recommended.

Factor: Income ratio should depend on capital contribution. Suppose there are three partners; they share capital at 40%, 30%, and 30%; this is advisable that there income ratio should also 40%, 30%, and 30%.