Overview
1st Peer Discussion post:
If I were forming a partnership with two other partners, I would make sure the partnership agreement clearly explains each partner’s responsibilities, the amount of cash and other assets each partner contributes, ownership percentages, how profits and losses will be divided, how decisions will be made, and how disputes will be resolved. The agreement should also explain what happens if a partner wants to leave, becomes unable to work, dies, or wants to sell their partnership interest. A major disadvantage of a partnership is that partners may have unlimited personal liability for business debts and obligations. Additionally, disagreements between partners can negatively affect the business, and each partner may be held responsible for the actions of another partner.
I would allocate partnership income or loss based on an agreed-upon ratio that reflects each partner’s contributions to the business. Because two of the partners are contributing services, I would include a salary allowance for those partners before distributing the remaining income or loss. This would recognize their ongoing work and help ensure that the allocation is fair. After salary allowances and any other agreed-upon allocations, the remaining income or loss would be divided according to the partnership agreement.
The allocation of partnership income among the partners appears on the Statement of Partners’ Capital (or partners’ equity statement). This statement shows each partner’s beginning capital balance, additional investments, share of partnership income or loss, withdrawals, and ending capital balance.
If a new partner purchases an interest in the partnership, I would require the approval of all existing partners and formally document the transaction. The new partner would purchase an ownership interest from one or more existing partners, and the purchase price would generally be paid directly to the selling partner or partners. The partnership agreement should also be updated to reflect the new partner’s ownership percentage, rights, responsibilities, and share of future income and losses. This process would help protect the existing partners and make the new partner’s role clear.
In your responses to your classmates, address the following:
- Review their partnership agreement. Can you think of any other advantages or disadvantages of the partnership form of organization?
- Discuss why you would or would not want to belong to this particular partnership.
2nd peer discussion post:
If I were forming a partnership, it would be to open a local homeschool co-op that provides classes, field trips, enrichment activities, and a place where homeschool families can build a community. Since this is something I really care about, I would want a partnership agreement that clearly explains each person's financial investment, responsibilities, decision-making authority, and what happens if someone decides to leave the business. I would also want us to agree on our mission and values because I think it's important that everyone has the same vision for serving families. One thing I would be careful about is choosing business partners who are dependable, communicate well, and genuinely care about helping children instead of only making money. I know partnerships can become difficult if people have different expectations or if one person is not contributing their fair share.
Since all three partners would be investing money and two of us would also be teaching classes or helping run the co-op every day, I think it would be fair to include a salary allowance for those partners before dividing the remaining profits. After that, I would allocate the remaining income or loss based on each partner's ownership percentage that we agreed on in the partnership agreement. The allocation of partnership income is reported on the statement of partners' equity, which shows each partner's share of the business. If we decided to bring in a new partner later, I would want all current partners to agree before adding them. I would also update the partnership agreement to reflect the new ownership percentages, responsibilities, and expectations. I believe taking the time to choose the right partners and having everything clearly written down would give our homeschool co-op the best chance to grow and serve families for many years (Wild et al., 2014).
In your responses to your classmates, address the following:
- Review their partnership agreement. Can you think of any other advantages or disadvantages of the partnership form of organization?
- Discuss why you would or would not want to belong to this particular partnership.