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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 examples that try to provide us with an outline of the most common partnership. It is very difficult to deal with complete sets of partnership examples since thousands of such examples vary according to the situation and the legal structure for partnership. Let’s try to understand what exactly partnership means through the below examples.
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Let’s take an example to understand the calculation of the Partnership in a better manner.
You can download this Partnership Example Excel Template here – Partnership Example Excel TemplatePartnership Example #1 – Complex Partnership
John and Smith invested $8,000 and $1,000, respectively, in a business. After six months, one partner Andy 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 get?
So from the above-given information, John, Smith, and Andy are 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
The total duration after which John, Smith, and Andy get profit is 3 Years
John and Smith Invested money for 3 Years, which is 36 months, and Andy invested money after 6 months of John and Smith so the duration of Andy’s investment money is Two and a half years which is for 30 months.
So, in the agreement, John, Smith, and Andy decide that a profit of $9,660 should be distributed among them in the same proportion as their respective contributions. In this case, contribution refers to the amount of money invested and the variable period they have invested.
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 the common multiple that is three zeros in all, and all numbers are divisible by 36, which results as below,
So the 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.
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 will go to Smith, and 6 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 = ($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. 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 will Mark get out of a profit of $880?
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 gives 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.
Mark Earning for Managing a Business = $880*12.5/100
Mark Earning for Managing a Business = $110
Now, the profit of $770 should be split in the same ratio of 5:6 between Mark and Donald.
If we split $770 into 11 (5+6) equal parts, then out of those 11 parts, 5 parts will go to Mark, and 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
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 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.
This means 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 the share of David from overall profit is approximately $8,950Conclusion
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 belief, which is based on a fiduciary relationship. The above examples explain how to profit share among the partners as per the invested capital and the investment duration. 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. Sleeping partners are just an investor in 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 –
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