A new business client comes to your office. There are three owners of the business. The three individuals, Alan, Bob, and Carol, are thinking about forming a partnership. Alan is only investing $1 million in cash. He will not have anything to do with the daily activities of the business. Bob has had some experience in the business and will be responsible for the day-to-day operations of the business. Carol has a great deal of experience and many contacts within the business. She will be responsible for attracting new clients. Neither Bob nor Carol are investing cash into the partnership. During the first year of operation, the partnership generated a profit of $150,000. None of the partners received distributions during the year.

Payment of Salary

A. Should the two partners who are working in the business receive a salary? Why or why not? Be sure to support your decision with research and quantitative data.

B. If the two non-investors did receive a salary, how would their capital account be affected? How would this impact a potential future liquidation or buyout? Be sure to thoroughly explain and support your answer.

C. Should the cash investor receive a higher share of the profits or other sharing options? Why or why not? Support your opinions with research and quantitative data.

D. If the cash investor did receive a salary, how would his capital account be affected? How would this impact a potential future liquidation or buyout? Be sure to thoroughly explain and support your answer.