Overview of Partnership Example
When two or more people come together for the common purpose of starting to do a business and who have agreed to share management and profit is called Partnership. Below are some of the examples try to provide us an outline of the most common partnership. It is very difficult to deal with complete sets of partnership examples since there are thousands of such partnership examples, which vary according to the situation and as per legal structure for partnership. Let’s try to understand what exactly partnership means through the below examples.
Examples of Partnership (With Excel Template)
Let’s take an example to understand the calculation of the Partnership in a better manner.
Partnership Example #1 – Complex Partnership
John and Smith invested $8,000 and $1,000 respectively in a business. After six months, one partner Andy also joined them with an investment of $6,000. If at the end of three years, the total profit is $9,660, what profits will John, Smith and Andy will get?
Solution:
So from above-given information John, Smith, and Andy investing money in a business, as per given below:
- John Investment: $8,000 (36 Months)
- Smith Investment: $1,000 (36 Months)
- Andy Investment: $6,000 (30 Months)
- After 3 Years of total profit is: $9,660
Total duration after which John, Smith, and Andy get profit is 3 Years
John and Smith Invested money for 3 Years that is 36 months and Andy invested money after 6 months of John and Smith so the duration of Andy invested money is Two and a half years that is for 30 months.
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So a profit of $9,660 needs to be distributed among John, Smith, and Andy, and they agreed that the profit should be distributed in the same proportion as their contribution. Contribution, in this case, is the amount of money invested, and the time period for which they invested because they have invested in the variable time period.
Calculation of Contribution Ratio
Contribution Ratio is = Amount of money invested × Duration
Contribution Ratio of John
- Contribution Ratio = $8,000 × 36
- Contribution Ratio = $88,000
Contribution Ratio of Smith
- Contribution Ratio = $1,000 × 36
- Contribution Ratio = $36,000
Contribution Ratio of Andy
- Contribution Ratio = $6,000 × 30
- Contribution Ratio = $1, 80,000
So Contribution Ratio between John, Smith and Andy = $2, 88,000: $36,000:$1, 80,000
So from above, we can remove common multiple that is three zeros in all and all number are divisible by 36 which results as below,
So Contribution Ratio between John, Smith and Andy = 8: 1: 5
Now, the profit of $9,660 should also be split in the same ratio of 8: 1: 5 between John, Smith, and Andy.
What this means is that if we split $9,660 into 14 (8+1+5) equal parts, then out of those 14 parts 8 parts will go to John, 1 part will go to Smith and 6 parts will go to Andy.
Calculation of Profit Shares
Profit Shares of John
- Profit Shares of John = ($9,660/14) × 8
- Profit Shares of John = $5,520
Profit Shares of Smith
- Profit Shares of Smith = ($9,660/14) × 1
- Profit Shares of Smith = $690
Profit Shares of Andy
- Profit Shares of Andy = ($9,660/14) × 5
- Profit Shares of Andy = $3,450
So John, Smith, and Andy will get a profit of $5,520, $690 and $3,450 respectively.
Partnership Example #2 – Sleeping Partnership
Mark is working, and Donald is a sleeping partner in a business. Mark invested $5,000 in business and Donald invested $6,000 in business. Mark receives 12.5% of the profit for managing the business as he is working partner in a business and the rest of the profit is divided in proportion to their capital. What does Mark will get out of a profit of $880?
Solution:
So here Mark is a working partner and Donald is the sleeping partner.
- Mark Investment: $5,000
- Donald Investment: $6,000
Calculation of Contribution Ratio
Contribution Ratio between Mark and Donald
- Contribution Ratio between Mark and Donald = $5,000: $6,000
So from above, we can remove common multiple that is three zeros which give us,
- Contribution Ration between Mark and Donald = 5: 6
Here Total profit earned by Mark and Donald Business is $880.
Out of $880, Profit Mark will get a 12.5% profit for managing the business which is as follows.
- Mark Earning for Managing a Business = $880×12.5/100
- Mark Earning for Managing a Business = $110
Remaining Profit which needs to be divided between Mark and Donald in proportion to their capital = $880 – $110 = $770
Now, the profit of $770 should also be split in the same ratio of 5:6 between Mark and Donald
What this means is that if we split $770 into 11 (5+6) equal parts, then out of those 11 parts, 5 parts will go to Mark, 1 and 6 parts will go to Donald.
Profit Shares for Mark
- Profit Shares for Mark = ($770/11) × 5
- Profit Shares for Mark = $350
Profit Shares for Donald
- Profit Shares for Donald = ($770/11) × 6
- Profit Shares for Donald = $420
So Mark will get ($350+$110) = $460 out of the total profit of $880 as a working partner.
Partnership Example #3 – Fixed Percentage Amount
Simon, Mark, and David invested in a business, and they contribute $4,380, $2,920 and $6,300 respectively with an agreement that each was to receive 5% on their respective investment, and the remainder of the gain of the firm if any was to be divided between them in the proportion of sum originally advanced. The overall profit of the firm was $20,000, what was the share of David from overall profit?
Solution:
- Contribution of Simon: $4,380
- Contribution of Mark: $2,920
- Contribution of David: $6,300
- Total Profit of Firm: $20,000
Interests to be received by all three is: 5%
- So for giving a 5 % interest we have to add all three contributions ($4,380 + $2,920 + $6,300) = $13,600
- Fixed amount to be received by all three = $13,600 × (5/100) = $680
- So out of overall all profits of $20,000, $680 is distributed among all three and then remaining outstanding profit which is $20,000 – $680 = $19,320 is distributed in proportion to their investment.
So Contribution Ration between Simon, Mark and David = 438: 292:630
- The profit of $19,320 should also be split in the same ratio of 438: 292:630 between Simon, Mark, and David.
- What this means is that if we split $19,320 into 1360 (438+292+630) equal parts.
- Share of David = ($19,320 × $630)/1360
- Share of David = $8949.70 ≈ $8,950
So share of David from overall profit is approximately $8,950
Conclusion
Under the above discussion of Partnership examples, we can conclude that it is a legal business, and its partners are also legal. From the above examples, we can say that the most important thing in the partnership business is a belief, and it is based on a fiduciary relationship. The above examples explain to us how profit shares among the partners as per the capital they invested and the duration of the investment. It also explains to us how sleeping partners and working partner agreements work and it shows that working partners get more contribution from profit than sleeping partners as he is the one who manages the entire business and sleeping partners just an investor to the business.
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