Question

Lane and Hill have decided to form a partnership. Lane is to contribute £150,000 as capital and Hill £20,000. Hill is to work full time in the business and Lane one day a week. Because Hill has no other income, she anticipates making drawings of £1,000 per month from the partnership. Lane expects to make drawings of about £1,000 per quarter. You have been asked to advise the partners on how to share profits in such a way as to compensate each of them for their unequal contributions of capital and labour and withdrawals.

Answer 1

When a partner takes a draw, he essentially reduces the business' equity. This reduction of equity means the business ends up with less cash or fewer assets as the result of each draw. As such, draw records usually have a negative number. For example, if a partner takes a draw of $1,000, the draw account will read minus $1,000. When draws are significant, they can result in less money with which to run the business.

So,If the one partner in the business' can take the drawing more the then the another , this is unequality in there partnership. As such,

1 partner take $1000 per month = 12000 per annual

2 partner take $1000 per quarter = 4000 per annual

-- the difference between the drawing can be treated as the 2 partner capital contribution in the business = $8000 additional capital per annual and the profit sharing ratio will increase as the capital of partners increase in the business.

let take one example :-

ABC company started with the two partner ram and sham. Ram contribute capital $1,000,000 and sham contribute $500,000. Ram withdraw money $100,000 per quarter and sharm withdraw $50,000 per month. As such situation, Ram give a decision -

take the extra money is taken by Sham are treated as the Ram capital and Sham agree with there statement

so at that time there profit sharing ratio are 1,000,000 : 500,000 - 2 : 1

after one year,

sham withdraw - 50,000 *12 = $600,000

ram withdraw - 100,000*4 = $400,000

so the difference in there withdraw are treated as Ram capital, As such ram capital is 1,200,0000

now, profit sharing is 1,200,000 : 500,000 - 2.4 : 1

so, profit is taken by Ram is more then the Sham, there will be no unequality in there partnership