WHAT KIND OF BUSINESS IS THIS? After graduating from college, Shelley Williams h
ID: 1217346 • Letter: W
Question
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 a 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?
Explanation / Answer
The accountant should advice Shelley Williams and Yvonne Hargrove the importance of a written partnership agreement. If they don’t spell out their rights and responsibilities in a written business partnership agreement, they will be ill-equipped to settle conflicts when they arise, and minor misunderstandings may turn into full-blown disputes.
Highlight the importance of partnership agreement that allows them to structure their relationship with each other in a way that suits their business. They can also establish the shares of profits each partner will take, the responsibilities of each partner, what will happen if a partner leaves, and other important guidelines.
The accountant should also advise about what to include in their partnership agreement, and consider these issues before coming into an agreement. The major areas the partnership agreement should cover that include name of the partnership, contribution to the partnership, allocation of profits, losses, and draws, partners’ authority and decision-making, management duties.so on and so forth.
To protect the benefits, the accountant has to keep them informed that Limited Partnerships and Limited Liability Partnerships can enjoy tax and confidentiality benefits in their jurisdiction. In the absence of a correctly drafted partnership agreement, these benefits may be negated by minor disputes which would otherwise be avoided by the terms of a written agreement.
*****
Related Questions
Navigate
Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.