A client of yours is considering going into a partnership with a business associate. The partnership would

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Question:

A client of yours is considering going into a partnership with a business associate. The partnership would own a retail gourmet ice cream shop. Your client anticipates investing $150,000 and working ten hours a week. His business associate will invest $50,000 and work forty hours a week. Your client has requested your informed perspective on a number of items before he commits to the business partnership.

1. Your client does not think that splitting the partnership income 50-50 will be fair to either partner. He has asked you to recommend clauses in the partnership agreement that stipulate partnership income and loss allocations.

Create a recommended income allocation schedule using interest allowances at 10 percent a year and salary allowances at $25 an hour. For the sake of example, assume partnership income of $100,000.
Create a recommended loss allocation schedule. For the sake of example, assume partnership losses of $40,000.

2. Your client would also like you to create a schedule that shows what happens if this partnership is successful and the two partners agree to sell the company in 10 years.

For the sake of this calculation, pretend that the partnership's assets in 10 years are $900,000, liabilities are $200,000, your client's capital is $400,000 and his associate's capital is $300,000.
Pretend that the partnership assets are sold for $1,200,000, and the liabilities are settled for the existing value of $200,000.

3.. The company's flagship location would be in Buffalo, New York, but the potential partners have already discussed opening additional locations in Toronto, Canada. The client knows that as a partnership they would not have to meet the Securities and Exchange Commission's segment reporting requirements, but the client wants to know what happens if they reorganize as a corporation when they move into the Canadian market. Discuss how the Securities and Exchange Commission's segment reporting requirements apply to corporations.