Question

After graduating from college, Shelley Williams held several different jobs but found that she did not enjoy working for other people. Finally, she and Yvonne Hargrove, her college roommate, decided to start a business of their own. They rented a small building and opened a florist shop selling cut flowers such as roses and chrysanthemums that they bought from a local greenhouse.

Williams and Hargrove agreed orally to share profits and losses equally, although they also decided to take no money from the operation for at least four months. No other arrangements were made, but the business did reasonably well and, after the first four months had passed, each began to draw out $500 in cash every week.

At year-end, they took their financial records to a local accountant so that they could get their income tax returns completed. He informed them that they had been operating as a partnership and that they should draw up a formal articles of partnership agreement or consider incorporation or some other legal form of organization. They confessed that they had never really considered the issue and asked for his advice on the matter.

What advice should the accountant give to these clients?

Answer 1

Both Williams and Hargrove start their business without having any partnership deed. The accountant should advise them for having such partnership deed to avoid any further issues in the life of their partnership firm. He should explain them the benefits of having partnership deed by highlighting its importance.

A written partnership deed will provide benefit of written contract regarding to the distribution of profit or any losses, guidelines in case of retirement, death or admission of partner in the business. Both partners start drawing $500 every week, which may create conflict in future. With a partnership deed, it will provide a clause for drawings, contribution and authority provided to each partner.

Partnership agreement or deep that contains name and address of firm, partner’s contribution, duration of firm, profit sharing, etc. will also explain the duties of the partners and also clarify the salary given to each partner. A registered partnership firm will also have the right to file case in the court against any third party or any co-partner. Thus, the accountant should explain both the partners about the benefits of registering firm.