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WHAT KIND OF BUSINESS IS THIS?

After graduating from college, Shelley Williams held several different jobs but found that she did not enjoy working for other people. Finally, she and Yvonne Hargrove, her college roommate, decided to start a business of their own. They rented a small building and opened a florist shop selling cut flowers such as roses and chrysanthemums that they bought from a local greenhouse.

Williams and Hargrove agreed orally to share profits and losses equally, although they also decided to take no money from the operation for at least four months. No other arrangements were made, but the business did reasonably well, and after the first four months had passed, each began to draw out $500 in cash every week.

At year-end, they took their financial records to a local accountant so that they could get their income tax returns completed. He informed them that they had been operating as a partnership and that they should draw up formal articles of partnership agreement or consider incorporation or some other legal form of organization. They confessed that they had never really considered the issue and asked for his advice on the matter.

What advice should the accountant give to these clients?

Name and address of each partner.

Business location.

Description of the nature of the business.

Rights and responsibilities of each partner.

Initial contribution to be made by each partner and the method to be used for valuation.

Specific method by which profits and losses are to be allocated.

Periodic withdrawal of assets by each partner.

Procedure for admitting new partners.

Method for arbitrating partnership disputes.

Life insurance provisions enabling remaining partners to acquire the interest of any deceased partner.

Method for settling a partners share in the business upon withdrawal, retirement, or death.

Accounting for Capital Contributions

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