ter many years working with a large consulting partnership, you and several of y
ID: 390119 • Letter: T
Question
ter many years working with a large consulting partnership, you and several of your busines asoci- and friends decide to form your own consulting business as a limited liability partnership. You and of your close friends have 20 to 25 years' experience in the consulting field. Each of you plans to fiv ribute capital putation and expects to attract no he firm's clients, at least in the first few years. You six partners will manage only a few of the fim's con- f $400,000 to the business. Each of you has a strong national reputation and expects to at engagements, but you six will bring to the firm clients generating $40,000,000 of annual revenue for the sulti h of you also has experience managing consulting businesses, including expertise in personnel, financial. firm. and marketing matters In addition, 15 other partners with uill contribute capital of $200,000. Although they are expected to bring few clients to the firm at this time, they ane expected to service the firm's clients and to bring in new clients as their reputations and skills expand and as the ix older partners retire. Chiefly, these 15 partners will take charge of consulting engagements. They will directly supervise the firm's 50 associate consultants. The associate consultants will not be partners when the partnership is formed, but some expect to be offered partnership status within 5 to 10 years. What are the default rules regarding how the partnership will be managed? Why are those default rules inappropriate for this partnership? 10 to 15 years' experience will join the new firm. Each of these 15 partners nite the management section of the partnership agreement. Accommodate the interests of all partners. What are the default rules regarding how the partners are compensated? y are those default rules inappropriate for this partnership? nte the compensation section of the partnership agreement. Accommodate the interests of all partners.Explanation / Answer
Partnership can be defined as an Alliance or Association with another to produce something which may be of value for all involved participants. It enables individuals collaborating with each other by working together towards a common purpose for achievement of combined objectives which are mutually beneficial. Partnership can be an extremely powerful tool for small business owners to acquire quick growth, diversification and achieve expansion goals in relatively shorter time periods due to the expertise, network and infrastructure of the larger business collaborated with. Partnership can also help small businesses attain desired results with minimal investment as resources are pooled together. Both tangible and intangible assets provide a major advantage through sharing improved availability in the form of infrastructure and support services along with intangibles such as expertise, brand name, goodwill and service awareness. The risk management and problem resolution also becomes much more efficient due to involvement of a larger entity providing better monitoring and control along with mitigation and resolution, and dilution of risks due to sharing.
Default rules become applicable in the absence of a written agreement.bThe default rules for sharing under regulation 7 and 8 of the limited liability partnership regulations 2001 are:
All members of a limited liability partnership are entitled to equal shares in the capital and profits as specified under regulation 7(1).q
Every member has the right to take part in the management and be involved in the decision making within a limited liability partnership under regulation 7(3).
The expulsion of a member can only be through Express agreement between the members in conference under regulation 8.
The default rules are inappropriate for this partnership as the resources that each partner is investing, both tangible and intangible, differ vastly resulting in great variation and investment by different partners which can finally result in dissatisfaction due to inadequate returns and a feeling of unfairness which may finally jeopardize the partnership. The management decisions need to be allocated weightage on the basis of investments made by individuals as the risk exposure of individuals with higher investment is much more than others, and a decision which exposes the company to high risk therefore has larger impact on such individuals. It is only fair that weighted be provided to decision making power on the basis of investment.
The management of the partnership will be through a unanimous vote or the vote of the majority, with senior partners having the advantage of a single vote having double weightage due to the vast experience and expertise they hold, and in consideration of the larger risk exposure they face.
The default rules regarding the compensation of partners are as above, providing equal share to every partner. This rule cannot be applied as the variation in investment is large and such a rule would lead to a major disadvantage and unfairness being caused to different partners.
The net profits and losses of the partnership for accounting and tax purposes will be distributed among all partners in the ratio of initial capital introduced and revenue generated for the period under consideration. Subject to changes upon introduction of fresh capital to provide adequate representation to the introduced amounts, and maintain similar balance in future distributions.
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