Brenda Wilson, Elizabeth Higgins, and Helen Poncelet form a partnership as a fir
ID: 2500578 • Letter: B
Question
Brenda Wilson, Elizabeth Higgins, and Helen Poncelet form a partnership as a first step in creating a business. Wilson invests most of the capital but does not plan to be actively involved in the day-to-day operations. Higgins has had some experience and is expected to do a majority of the daily work. Poncelet has been in this line of business for some time and has many connections. Therefore, she will devote a majority of her time to getting new clients.
Required
Write a memo to these three partners suggesting at least two different ways in which the profits of
the partnership can be allocated each year in order to be fair to all parties.
Explanation / Answer
The partnership is formed in such a way that Two working partners and one sleeping partner. The sleeping partner will contribute majority of capital. The working partners will concentrate in the business. One working partner deals withday today business other partner with net work development and growth.
The profit should be shared in such a way that every one will be equally benefited according to thier dedication and contribution. The Contributor of capital have to get return on money invested and working partner's have to compensate for their effert. Definitly all these dfepends on performance of business.
We can choose following alternatives:
1. Based on Industry standard find out the Salary drawn by a person in charge of business. Since Higgins dedicated his 100 % time for business fix a salary just below the industry standard. Poncelet has devoted a part of his time for getting new client he should be compensated by commission. The commission must be just below industry standard. It is calculated on additional business brought by him. The profit after Higggins salry and Poncelet commission to be distributed based on Capital contribution. IOt ensure that working partners will get a minimum remuneration for their effert and the Wilson will be paid for his risk
2. The business is always involved certain element of risk. All partners have to bear the same. To ensure this we can have an alternative profit sharing pattern. In case of loss it should be shared by all the partners in equal ratio ie 1:1:1. The risk of business is born by Wilson who invested major portion of capital. So he should be paid for his risk. In case of profit sharing ratio can be st as follows 4:2:1. It ensures that Wilson will get a reasonable return on capital and Higgins get the benefit of his 100 percentage involvement.