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. Answer the following: E. How do the payment of salary and the allocation of profit affect entries and the financial bottom line? Be sure to support your explanation with concrete examples. F. How could the payment of salary and allocation of profit be a more effective method of splitting the company’s profits for the three partners? Explain a scenario in which the three partners would all be compensated fairly, and support your answer with logical reasoning. G. What would be the value of each partner’s capital account at the end of the year, given your proposed fair 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 operations.And Carol also has some experice and some contracts within the business which can be proved useful for the expansion of the business.Bob & Carol are not investing cash into the business.

During the year, the business has generated profit of $150,000 and none of the partners received the distributions during the year.

The main concern faced by the firm is the method of distribution of profits earned by the enterprise among the partners which can be concluded as fair method of distribution among the partners taking into consideration the efforts made by them.

Since Alon has invested only capital in the firm, then he should be entitled to get fair return in the form of Interest on Capital by the Firm.He should not be entitled for partner remuneration since he is not involved in day to day operations of the enterprises.

Bob has some experience and regularly employed in day to day activities, so he should be deemed as Working partner of the firm and should be entitled to Partner remuneration.

Arnol also has experience and also has some contracts within the business, so should be entitled to regular Partner remuneration and Commission for the contracts entered by her on behalf of the firm.