Jerry Graves and Bonnie Moss decide to form a partnership. Graves will contribut

Question

Jerry Graves and Bonnie Moss decide to form a partnership. Graves will contribute $300,000 to the partnership, while Moss will contribute only $30,000. However, Moss will be responsible for running the day-to-day operations of the partnership, which are anticipated to require about 45 hours per week. In contrast, Graves will only work five hours per week for the partnership. The two partners are attempting to determine a formula for dividing partnership net income. Graves believes the partners should divide income in the ratio of 7:3, favoring Graves, since Graves provides the majority of the capital. Moss believes the income should be divided 7:3, favoring Moss, since Moss provides the majority of effort in running the partnership business. How would you advise the partners in developing a method for dividing income?

Explanation / Answer

Hi, Based on the case study above, moss can be give a fixed monthly salary. This will also help in reducing the tax burden on the firm. While graves profit can be treated as a return on his investment. Thanks, Aman

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