Question

Partnership agreements can vary, depending upon what a partner contributes to the agreement. Each partner brings certain personal skills and assets into a partnership. For example, one partner could supply technical knowledge, while the other partner supplies business knowledge or perhaps the financing for the partnership. When there are two parties involved, the partnership agreement would easily be split 50/50.

However, when there are multiple partners involved, the partnership becomes more complicated. Perhaps one partner supplies time to run the business, another partner supplies talent, and the third partner supplies physical assets, and yet another partner supplies financing. The partnership agreement obviously becomes more difficult to structure.

There are different methods used to allocate income among the partners. Income can be allocated based on stated ratios, services, and capital. Some partners do not provide any services, but provide capital such as cash or equipment to the partnership. This is why it's so important to choose a business form that bests covers the needs and wants of everyone in involved.

Imagine you are forming a partnership with two other partners. All three of you have cash to invest in the business as well as skills to contribute. Two of your partners will provide services, along with investing cash. Prepare a report that addresses the following points:

1. Identify three details you think should be included in the partnership agreement.

2. What disadvantages should you be aware of when forming a partnership?

3. How will you allocate income or loss?

4. Will you also include a salary allowance for the partners who contribute services? Why or why not?

5. Allocation of partnership income among the partners appears on what financial statement?

6. How will you handle the admission of the new partner if he or she purchases an interest in the partnership?

Please answer all of the questions, if you can not answer all of the questions do not reply.

Answer 1

1. Identify three details you think should be included in the partnership agreement?

Ans:

1. First and foremost who are all the partners and there contribution to the firm.
2. Their Profit Sharing Ratio in case of profits from the business.
3. Their Loss Sharing Ratio in case of losses from the business,
4. Salary to partners, if any.
5. Procedure when a partner dies or retires or new partner adds into the agreement.

2. What disadvantages should you be aware of when forming a partnership?

Ans:

1. There is limitation on the capital obtained by us as we can’t go for public issue like companies.
2. And the risk we take is also will be limited.
3. There is a risk that when a partner dies, the firm should dissolve.

3. How will you allocate income or loss?

Ans: In case profit or loss sharing ratio has been specified, then in that ratio. If not then in equal ratio.

4. Will you also include a salary allowance for the partners who contribute services? Why or why not?

Ans: I will include salary allowance to partners as this will become the income for the partners monthly rather than drawings of unnecessary amounts from the firm and there is a case that some partners may be actively working but some others may not.

5. Allocation of partnership income among the partners appears on what financial statement?

Ans: It will not appear in the financial statements as only the profit will come in the financial statements and how we distribute the same is not considered by the financial statements. It will appear in the partner’s capital or current account.

6. How will you handle the admission of the new partner if he or she purchases an interest in the partnership?

Ans: If we had a new partner we will constitute the accounts freshly, that is closing the previous accounts and then freshly starting the accounts of the firm as it will remove confusions later.