Business partnership makes profits and such profits must be divided among partners in an equitable manner. Despite this moral rule most partnerships divide profits equally. But does this equal division of profit is equitable or justifiable? My analysis and recommendation is given below:
1. In a partnership business partners contribute in two ways: one is giving part of their money as capital; other is demonstrating interest in the business. However, there is no reason to expect that every partner will have the same level of interest. Some partners take active part while there are instances where you see a non-active sleeping partner. Let us assume a case where you and your spouse are partners; your spouse does not actively engaged in the business but minds the hearth and bed at home. Can you divide the business profit equally? Even if your wife has contributed equal amount of capital it is not possible businesswise to divide profits equally
2. There are instances where partners contribute different amount of capital to begin with. In this case nobody can insist that partnership profits must be divided equally.
3. Partners open two accounts in the books; one relates to the capital and other one is an operating/current account. Normally capital account is fixed. At the time of appropriation salaries or commission payable to partners are credited to the operating/current account. Even though partners contributed, let us say, equal amount of capital the current account balance may vary from partner to partner. Some partners withdraw money and others leave it intact. A partner who has left more money in this current account, contributes indirectly to the capital funds of the partnership. Therefore, it is not morally right to divide profits equally. My argument is that both capital and current account must be augmented to arrive at a consolidated amount and profits should be shared in the proportion of the present capital funds available rather than on the original capital contributed. Alternatively, the capital account must be made fluctuating and the partners must be given a right to transfer any surplus available in the current account to this fluctuating capital account. Thereafter, profits must be shared in the proportion of the fluctuating capital account balances
4. Yet another issue is about compensation payable to partners. In many partnerships, this factor is never taken into account in dividing profits. For example, a business must employ someone to do the sales. If you have a partner doing sales then he must be paid allowance/commission. Assume there is no such compensation is paid; in that case it is against all the principles of business to divide profits equally
5. You can have several partners; but the real operation is minded by one or two partners. In case there is a managing partner, he must be paid emoluments in correspondence to what the market pays. Assume that he is paid a meagre allowance, can the partners decide to allocate profits equally. It is a cardinal duty to pay man’s wages in a proper manner
6. Not every partner can bring business or nurture customers and clients. Among partners there could be one person who holds a magical wand. He has the charisma and personality to get going with people and situations; a kind of a doer. He possesses cosmics that attracts the customers and turn sales opportunities into fruition. Such partner has cosmics that shape and influence partnership business positively. If he goes away the partnership would also wither away. If you are a partner in this business would you insist that profits must be divided equally?
The conclusion is simple. No partnership should divide profits equally but equitably. In the latter case you have to examine the contribution by each partner in terms of capital funds, level of interest and the aspect of cosmics and arrive at an equitable manner in dividing profit among partners.
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