Amelia, Hannah, and Lucretia, who had been friends since high school, have a business they formed as a partnership. The business takes orders for parties and then provides all of the decorations to match the party theme, orders food, and contracts for entertainment for the party. They named the business Party On! They all majored in business in college and felt capable of running their business. Because they were in a hurry to get started, and were old friends, they did not put their articles of partnership in writing, but instead relied on mutual trust. To get the business started and operating its first year, Amelia contributed $200,000 to the business, Hannah contributed $40,000 to the business, and Lucretia contributed $20,000 to the business. They discussed how profits and losses
would be divided, but never came to a solid conclusion; therefore, Amelia thought they would divide them according to the percentage of their contributions, but Hannah and Lucretia thought they would be divided equally. Six months into operating the business they had a disagreement about whether they should limit their business to children's parties or should expand to include adult and corporate events. Amelia wanted to expand to the adult and corporate market but Hannah and Lucretia wanted to remain focused on children's parties. By the end of the first year, the women were so divided that Hannah and Lucretia decided to quit working with Amelia and open their own business. They demanded that the business be sold and their contributions returned to them. Which of the following statements is true about the division of profits and losses?
A. Division of profits and losses is one of the benefits of forming a business as a partnership.
B. Profits and losses are always divided equally by partners.
C. Profits and losses are always divided in the same proportion/percentage as the partners' contributions.
D. The division of profits and losses must always be spelled out in the articles of partnership.
Answer: A
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