Chapter 16, Problem 16.4C

Sharing Losses during Liquidation
Research
Hiller, Luna, and Welsh are attempting to form a partnership to operate a travel agency. They have agreed to share profits in a ratio of 4:3:2 but cannot settle on the terms of the partnership agreement relating to possible liquidation. Hiller believes that it is best not to get into any arguments about potential liquidation now because the partnership will be a success and it is not necessary to think negatively now. Luna believes that in the event of liquidation, any losses should be shared equally because each partner would have worked equally for the partnership’s success, or lack thereof. Welsh believes that any losses during liquidation should be distributed in the ratio of capital balances at the beginning of any liquidation because then the losses will be distributed based on a capital ability to bear the losses.

You have been asked to help resolve the differences and to prepare a memo to the three individuals including the following items.

Required

1. Specify the procedures for allocating losses among partners stated in the Uniform Partnership Act of 1997 to be used if no partnership agreement terms are agreed upon regarding liquidation. (You may wish to access a copy of the UPA 1997 for this requirement.)
2. Critically assess each partner’s viewpoint, discussing the pros and cons of each.
3. Specify another option for allocating potential liquidation losses not included in the positions the three individuals currently take. Critically assess the pros and cons of your alternative.