Compose a memo addressing the allocation of profits tothree partners of a new business: Alan, Bob, and Carol. It's yourresponsibility to address the potential ways in which thefirst-year profits can be divided among these partners, includingwhether the partners should be taking a salary, how the partners'capital accounts may be affected by various decisions, and the mostethical way that the profits could be divided.
The memo should answer the following prompt: A newbusiness client comes to your office. There are three owners of thebusiness. The three individuals, Alan, Bob, and Carol, are thinkingabout forming a partnership. Alan is only investing $1 million incash. He will not have anything to do with the daily activities ofthe business. Bob has had some experience in the business and willbe responsible for the day-to-day operations of the business. Carolhas a great deal of experience and many contacts within thebusiness. 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 aprofit of $150,000. None of the partners received distributionsduring the year.
Specifically, the following critical elements must beaddressed:
I. Allocation of Profits
A. Explain how allocating the profitsevenly between the partners would work. Consider the fairness toeach of the partners in your response.
B. What would be the value of eachpartner's capital account at the end of the year, given that theprofits were allocated evenly among the three? Support your answerwith quantitative data and an explanation of how you came to thisconclusion.
C. Explain an alternative method ofallocating the profits if 80% of the profits was given to the cashinvestor and the remaining amount was split evenly between theother two partners.
D. What would be the value of eachpartner's capital account at the end of the year, given thisalternative allocation method? Support your answer withquantitative data and an explanation of how you came to thisconclusion.
II. Payment of Salary
A. Should the two partnerswho are working in the business receive a salary? Why or why not?Be sure to support your decision with research and quantitativedata.
B. If the two non-investors did receive asalary, how would their capital account be affected? How would thisimpact a potential future liquidation or buyout? Be sure tothoroughly explain and support your answer.
C. Should the cash investor receive ahigher share of the profits or other sharing options? Why or whynot? Support your opinions with research and quantitativedata.
D. If the cash investor did receive asalary, how would his capital account be affected? How would thisimpact a potential future liquidation or buyout? Be sure tothoroughly explain and support your answer.
E. How do the payment of salary and theallocation of profit affect entries and the financial bottom line?Be sure to support your explanation with concrete examples.
F. How could the payment of salary andallocation of profit be a more effective method of splitting thecompany's profits for the three partners? Explain a scenario inwhich the three partners would all be compensated fairly, andsupport your answer with logical reasoning.
G. What would be the value of eachpartner's capital account at the end of the year, given yourproposed fair allocation method? Support your answer withquantitative data and an explanation of how you came to thisconclusion.
