Partnership agreements can vary, depending upon what the 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, 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 involved.
Before you begin, please complete your reading assignment and view the presentations for the week.
Discussion Topic
Imagine that 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.
In your original post, answer the following:
- Are there any details you think should be included in the partnership agreement? What disadvantages should you be aware of when forming a partnership?
- How will you allocate income or loss? Will you also include a salary allowance for the partners who contribute services?
- Allocation of partnership income among the partners appears on what financial statement?
- How will you handle the admission of the new partner if he or she purchases an interest in the partnership?
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