Scenario

A client of yours is considering going into a partnership with a business associate. The partnership would own a retail gourmet ice cream shop. Your client anticipates investing $150,000 and working ten hours a week. His business associate will invest $50,000 and work forty hours a week. Your client has requested your informed perspective on a number of items before he commits to the business partnership.

1. Your client does not think that splitting the partnership income 50-50 will be fair to either partner. He has asked you to recommend clauses in the partnership agreement that stipulate partnership income and loss allocations.

• Create a recommended income allocation schedule using interest allowances at 10 percent a year and salary allowances at $25 an hour. For the sake of example, assume partnership income of $100,000.
• Create a recommended loss allocation schedule. For the sake of example, assume partnership losses of $40,000.

1. Your client would also like you to create a schedule that shows what happens if this partnership is successful and the two partners agree to sell the company in 10 years.

• For the sake of this calculation, pretend that the partnership's assets in 10 years are $900,000, liabilities are $200,000, your client's capital is $400,000 and his associate's capital is $300,000.
• Pretend that the partnership assets are sold for $1,200,000, and the liabilities are settled for the existing value of $200,000.

1. The company's flagship location would be in Buffalo, New York, but the potential partners have already discussed opening additional locations in Toronto, Canada. The client knows that as a partnership they would not have to meet the Securities and Exchange Commission's segment reporting requirements, but the client wants to know what happens if they reorganize as a corporation when they move into the Canadian market. Discuss how the Securities and Exchange Commission's segment reporting requirements apply to corporations.