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.

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.

C. Explain an alternative method of allocating the profits if 80% of the profits was given to the cash investor and the remaining amount was split evenly between the other two partners.

D. What would be the value of each partner’s capital account at the end of the year, given this alternative allocation method? Support your answer with quantitative data and an explanation of how you came to this conclusion.

Answer rating: 100% (QA)

A It will certainly work if the partnership agreement between the three says soie profits are to be ... View the full answer