Accounting, Payroll & Pension Issues/business partnerships
QUESTION: Partnership question:
Partner A and partner B decide to start a business. Partner A invests all the money, say $200,000 to setup the business. There is an agreement that partner B in the future will pay Partner A 50% of the $200,000 ($100,000) to own 50% of the business. They will operate and share 50/50 in the business immediately because Partner A has effectively lent partner B $100,000.
At some time later a major asset of the business is sold for $20,000. Partner A keeps the full amount of $20,000; partner B receives nothing of the $20,000.
How much does partner B now owe partner A?
ANSWER: What does the partnership agreement say about loan repayments? From the brief description provided, the $200,000 would appear to be a capital contribution, rather than a loan. What does the agreement between the partners say about repayment of the $200,000.
Also, it is not clear if the $20,000 sale of a major asset would be consider part of operating the business.
In summary, this is more of a legal question, rathe than a bookkeeping issue.
---------- FOLLOW-UP ----------
QUESTION: Arthur, thank you for taking the time to answer my question. Perhaps there wasn't enough information to give an expert answer, but I am hoping you can provide an instinctive answer as I can't really get my head around the logic of it.
Perhaps I can make the question a little clearer. The partnership is between good friends and there was never a written partnership agreement. It is understood and trusted that the money ($100,000)will be paid back.
The sold asset is not part of the operation of the business, it is just liquidation of an asset whereby partner A takes all of the proceeds from the sale.
I would assume that each partner is entitled to half of the proceeds, or $10,000 each. I imagine that reduces partner A's investment to $90,000 and as partner A also kept partner B's $10,000 I imagine that reduces the amount owed by $10,000?
Does partner B now owe partner A $80,000 (partner A's reduced investment of $90,000 minus partner B's foregone $10,000) or $90,000 (Partner A is entitled to the $10,000 leaving his investment at $100,000 minus partner B's foregone $10,000) ? This is what I am having trouble understanding.
First, this is more of a legal question than an accounting or tax question. You need to start with what is the intent of the partners.
Having said that, I also would assume that the proceeds from a sale of a asset owned by the partnership would be retained by the partnership. Since partnerships may buy and sell their assets, the sale of a partnership asset would be expected in the normal course of operations.
Partner A's capital account simply being reduced by the $20,000 he took and Partner A owing Partner B 1/2 the proceeds from the sale, $10,000, are both acceptable DEPENDING ON THE PARTNER'S INTENTIONS.
I would expect you to be confused as there is no "right" or "wrong" answer to this question. It depends on intent of the partners, there is no clear answer to your question.
Things to consider: are profits, or losses tom be split 50/50; what did each partner contribute; are proceeds from the sale of assets to be returned to the partners or retained by the partnership, etc.
Please consider talking to an attorney working in partnership law. You can always ask additional questions of me or others in this forum.