Partnership Example

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.

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 a 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 the 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 the 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 the 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.

Recommended Articles

This has been a guide to the Partnership Example. Here we discuss the introduction and top 3 examples of partnership along with a detailed explanation and downloadable excel template. You can also go through our other suggested articles to learn more –

1. Joint Venture Example
2. Monopolistic Competition Examples
3. Derivatives Example
4. Economies of Scale Example