A client of yours is seeking your help in understanding a number of issues involving various aspects of a partnership. The business under consideration is a manufacturer of custom fabricated steel building components such as fire escapes, stairways and landings, and racking systems. Provide a response to each of the questions your client has.
1. One of the potential partners wants to allocate partnership profits by including interest on invested capital and bonuses, as a percentage of net income after bonuses. Why would interest on capital be important given this type of business, and what is the best way to measure capital?
2. Determining a bonus on net income after the bonus seems counterintuitive. Why not just base the bonus on net income?
3. Are drawings and capital the same thing? Why is it necessary to make a distinction?
4. If a partner is legally considered an employee of the partnership and receives a regular paycheck and an annual W-2 statement, is this the same thing as the salary that is included in the profit-sharing agreement?
5. One of the potential partners wants to allocate profits by equal percentages, but allocate potential losses by a different percentage. Does this make sense given the nature of the business?
6. It has been suggested that the erection of the steel components be performed by a separate limited liability company (LLC) with which the partnership would contract. Rather than including this in the partnership, why might a separate LLC be a good idea?
7. The attorney, who has been advising the partners on the creation of a partnership, has indicated that she would have an interest in investing in the partnership. However, she would want the partnership to be organized as a limited partnership. Why would this be important to her?
8. In the above question, if the attorney, as a partner, were to receive an allocation of profits based on her invested capital, why wouldn't she rather just be an outside lender of capital?