Final answer:
The distribution of profits or losses in a partnership is not necessarily based on relative capital account balances if the agreement does not specify. The default rule is equal distribution among the partners. A written agreement can ensure profits and losses are allocated as intended.
Step-by-step explanation:
If a partnership agreement does not specify how profits or losses are to be distributed, they should not be automatically allocated based on relative capital account balances. Instead, the Uniform Partnership Act, which may be adopted by states, indicates that profits and losses should be shared equally among partners unless a written partnership agreement states otherwise. Without an explicit agreement, partners share equally in both the benefits and the responsibilities, regardless of the individual partner's capital contribution.
Disadvantages of General Partnership include that each partner is responsible for all of the business's debts and have personal liability. This means that in the case of bankruptcy or lawsuit, owners can lose personal assets. Moreover, in terms of management and decision-making, all partners typically have an equal say, regardless of their capital investment, unless agreed differently within the partnership agreement.
It's crucial for partners to have a written partnership agreement to avoid ambiguity and to ensure that profits and losses are allocated as intended by the partners. Otherwise, the default rule is to equally distribute profits and losses among partners.