Sara, Nada, and Maha are partners in The Innovation Co. (the “Company”) a genera

Question

Sara, Nada, and Maha are partners in The Innovation Co. (the “Company”) a general partnership that was working in the retail business. Sara and Nada contributed in the Capital of the company by SR. 10,000 each, while Maha’s contribution was SR. 5,000. The Partnership Agreement provided for “equal contribution of management to each partner as well as equal share of profits”. During the first 5 years the Company was doing very well, so the partners decided to expand the operation of the Company and they agreed that they need more funds in order to do that. Therefore, Sara suggested giving the company SR. 5000 as a loan and the other partners agreed. However, because Sara’s loan was not enough for the expansion plans, the partners decided to get a loan from a bank. Consequently, they received SR. 50,000 from National Commercial Bank (“NCB”) After securing all the funds they needed, the partners started executing their expansion plans. The plans proved to be a success and they were able to make good profits. 5 years later Sara, Nada and Maha disagreed on an issue regarding the operation of the Company, and after exhausting all their efforts to fix the problem, they agreed to dissolve the Company and wind up the business. How should the partners distribute the Company’s assets in accordance with the law? Putting in mind the following: • Company already made SR. 20,000 of payment on their NCB loan by time of dissolution. • Company’s net profit at time of dissolution is SR. 200,000. State the Rule of law that governs distribution of assets when winding up a general partnership and explain in details how you are going to distribute the Company’s assets.

Explanation / Answer

To protect creditors, most states have laws that govern the distribution of assets when a partnership dissolves. A dissolving partnership will usually have two basic categories of unpaid debts: debts owed to outside creditors and those owed to the partners themselves. Subject to any agreement to the contrary, partnership debts must be paid in the following order:

The partners may agree to vary these priorities among themselves, but they cannot change the rule that outside creditors must be paid first.

Distribution of company's Assets

1. Outsiders liability first - Bank loan from national commercial bank is to be paid first . Amount due to the bank i $30000 since $20000 is already paid.

2.Payment to partners for debts other than capital - Payment to Sara $5000 for her loan

3.Payment to partners for their capital contributions - Sara $10000, Nada $10000 and maha $5000

4.Balance left with partners after the above payments is $140000.This is to be paid to partners for their share of profits. Sharing ratio is equal. Hence payments are as follows

Sara $46667 Nada $46667 and Maha $46666

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