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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 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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Examples of Partnership (With Excel Template)

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 Template

Partnership 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?

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 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

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 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 $8,950

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 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.