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-years 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.
Specifically, the following critical elements must be addressed:
I. Allocation of Profits
a. Explain how allocating the profits evenly between the partners would work. Consider the fairness to each of the partners in your response.
b. What would be the value of each partner’s capital account at the end of the year, given that the profits were allocated evenly among the three? Support your answer with quantitative data and an explanation of how you came to this conclusion.
II. Payment of Salary
a. Should the two partners who are working in the business receive a salary? Why or why not? Be sure to support your decision with research and quantitative data.
b. If the two non-investors did receive a salary, how would their capital account be affected? How would this impact a potential future liquidation or buyout? Be sure to thoroughly explain and support your answer.
