After graduating from college, Shelley Williams held several different jobs but foundthat she did not enjoy working for other people. Finally, she and Yvonne Hargrove, hercollege roommate, decided to start a business of their own. They rented a small building andopened a florist shop selling cut flowers such as roses and chrysanthemums that they boughtfrom a local greenhouse.
Williams and Hargrove agreed orally to share profits and losses equally, althoughthey also decided to take no money from the operation for at least four months. No otherarrangements were made, but the business did reasonably well and, after the first four monthshad passed, each began to draw out $500 in cash every week.
At year-end, they took their financial records to a local accountant so that they couldget their income tax returns completed. He informed them that they had been operating as apartnership and that they should draw up a formal articles of partnership agreement orconsider incorporation or some other legal form of organization. They confessed that theyhad never really considered the issue and asked for his advice on the matter.
What advice should the accountant give to these clients?
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