CHAPTER IX

BUSINESS ORGANIZATION

SOLE PROPRIETORSHIP

Sole proprietorship. A business is usually owned and operated by one of three types of organization: individual ownership, partnership, or corporation.

A business owned and operated by an individual is classed as a sole proprietorship, since the owner does not necessarily have to consult with others; and as he alone is responsible for the administration of the business, he receives all the profits and suffers all the losses.

PARTNERSHIP

Nature of a partnership. A partnership is a contract relation between persons, known as partners, who combine their property, labor, or skill in a business and who agree to share the profits and losses jointly. In a partnership each of the partners has certain rights and obligations. It is important, therefore, that the fundamental points of such an organization be understood by those who plan to enter business.

The amount of money or other property which a partner contributes is called his investment. The total of the partners' investments constitutes the capital of the partnership.

The agreement covering a partnership may be verbal or written, but preferably the latter. Usually, the clauses in the written articles of partnership cover the following points:

1. Names of the partners and name of the firm.

2. Nature of the business. 3. Place of business.

4. Date of commencement and duration of partnership.

5. Capital to be invested and provisions for its withdrawal.

6. Salaries to be paid to the partners.
7. Interest to be paid on invested capital.
8. Division of profits and losses.
9. Provisions for dissolution.

Partners who actually take part in the conduct of the business and who are known publicly as partners are called real partners. Ordinarily real partners are liable for all the debts of the partnership. Partners who are known publicly as partners but who have no investment and no share in the profits are known as nominal partners. Such partners share the liability of real partners for the debts of the business. Partners who are not known to the public as partners but who receive a share of the profits are called silent partners. Such a partner is liable for the debts of the business as soon as his connection with the partnership is known publicly. Partners whose liability for the debts of the business are limited are called limited partners. In such cases the liability is usually limited to the amount invested.

The method of forming a limited partnership is prescribed by laws, which vary in the different states. Usually there must be one partner who is the manager of the business and whose liability is not limited.

Division of profits and losses. There are three general methods of distributing the profits and losses of a partnership: 1. In proportion to a partner's investment.

2. In some arbitrary division.

3. In proportion to the average investment.

Proportional division of profits. If the investments of the partners are equal and the profits (or losses) are divided in proportion to the investment, it is obvious that each partner receives an equal share of the profit.

EXAMPLE. In a partnership formed by A and B, profits are divided in proportion to the investment. If each invests $4000 and the net profit for a year is $2000, how much does each partner receive?

Solution. In this case each partner receives Hence A and B each receive $2000 × 1, or $1000.

of the profits.

If the investments are unequal and the profits are divided in proportion to the investment, the general method of determining the share of each partner is shown in the following example.

EXAMPLE. In a partnership formed by C and D, profits are divided in proportion to the investment. If C invests $3250 and D invests $2450, how much does each partner receive in a year in which the net profit is $1596?

Solution. $3250 + $2450 $5700, capital.

Check.

$1596

=

$5700 = 0.28 (or 28%), rate of profit.

$3250 × 0.28 = $910, C's profit.

$2450 × 0.28 = $686, D's profit.

$910+ $686 $1596, total profit.

=

This last method might have been applied in the first example on page 331, but where the investments are equal, the amount of each partner's profit is always the amount of the net profit divided by the number of partners. Hence the method there used is easier.

When simple ratios are involved, an example like the second one above can frequently be solved by inspection. Thus, if C had invested $3000 and D $2000, the capital of the firm would have been $5000. Hence C would have received of the net profit and D would have received .

Arbitrary division of profits. Often the business experience and skill of one partner or the time which one partner devotes to the business entitles him to receive a larger share of the profits than the other partners do, even though their investments are equal. The arbitrary method in which the profits are to be divided is generally prescribed by the articles of partnership.

If no division of profits is indicated in the articles of partnership, profits are divided equally, even though the investments are unequal.

EXAMPLE. A partnership is formed by E and F, and each invests $8000. On account of his greater business experience E is to receive 60% of the profits and F is to receive 40%. How much does each partner receive in a year in which the net profit is $2000?

State each partner's share of profit in the following cases:

Find each partner's share of the profit in the following cases:

$9000 $6000

11. Three men form a partnership, A investing $5000; B, $4000; and C, $7000. Profits and losses are to be shared as follows: A,; B, 4; and C, 3. In a year in which the net profit is $4228.35, find each partner's share and the per cent which is returned upon the investment of each partner.

12. If the profits in Ex. 11 had been shared in proportion to the investments of the partners, what would then have been each partner's share?

13. In a partnership formed by A, B, and C, the net profit for the first 6 mo. was $2847.90 and the net loss for the next 6 mo. was $762.24. Each partner invested $7500, but the profits and losses are shared as follows: A, 30%; B, 30%; and C, 40%. Prepare a table which shows each partner's share of the profit or loss for each half year and his net income for the year.

14. In a partnership formed by A and B, A invests $10,000, B invests $12,500, and profits and losses are shared equally. The net loss for a year was $2746.70. How much better would it have been for A if losses had been shared in proportion to the investment?

15. In a partnership, A invests $8000 and B invests $12,000. The articles of partnership provide that profits in excess of $2400 shall be divided equally, but that profits less than $2400 (and losses) shall be divided in proportion to the investment. If the profits for three years are as follows: 1st year $1789.50, 2d year $3487.20, 3d year $2510.80, find each partner's share of the profits for each year and their totals for the three years.

Division of profits by average investment. Sometimes, owing to changes during the year in the amount invested by each partner, one partner's share of the capital has been invested in the business longer than another's. A division of profits and losses which takes into account not only the amount invested but also the time in which the investment has actually been used in the business is known as a division according to the average investment. Such a method is illustrated in the following example.

EXAMPLE. On Jan. 1, A and B form a partnership, each investing $5000. On July 1, A invests $1000 more and on Oct. 1 he withdraws $1000. On March 1, B withdraws $1000 and on Dec. 1 he invests $1000. If profits and losses are shared in proportion to the average investment, find each partner's share of a net profit of $1425.

Although the investment of each partner on Jan. 1 and on Dec. 31 is $5000 in each case, it is apparent that A has had more money invested for a longer time than B. Hence, to divide the profits equally would be unfair to A.