Partnership - Share of Profit question

awwallace22

Can a partner have a fixed share of the profit every year rather than a percentage ratio, with the remaining profit going to the other partner ? I have always done the percentage share but I was asked the question. Im guessing the partner can but just need confirmation from my fellow members! Another thought ...what would happen if the partnership made a profit less than the agreed fixed amount? sounds messy :huh:

AK002

I would say they can as there are no 'rules' to say they can't.

I presume it would have to be documented in a partnership agreement tho, and also some sort of percentage split if the profit was lower.

Gem7321

Yes you can, but as AK said it would be best to have a partnership agreement in place.

If the business makes a loss, the partner can still have their fixed profit share and the loss will be distributed to the other partners.

I have a partnership where the partner A is entitled to 1/3 of the profit or at least £500, even if the business makes a loss, then the rest is distributed equally to partners B and C.

awwallace22

Thanks guys for your input, much appreciated

Jon1

Hi

Not sure if that's the case, if the partnership makes a loss don't think any partner can then declare an profit, despite what the partnership agreement says.

Thanks
Jonathan

Gem7321

It's called a pre-allocation of profit or salary rather than a profit share

Jon1

How can you have a pre allocation of profits if the partnership has made losses.

Thanks
Jon

Gem7321

Because the partner is pre-allocated a profit share/salary of at least £500 before the results are known as stated in the partnership agreement :thumbup1:

Jon1

Wow I've had to get the leg out.

please see ITTOIA (2005) s850

Gem7321

What is the problem with the partner being allocated £500 as a salary? It's just an appropriation, it's drawings but called something different.

They've been trading this way since before I was born and the partners involved, HMRC, my manager and responsible partner have never had a problem with it. And neither have the solicitors who wrote up the partnership agreement.

deanshepherd

Apologies to the partners, HMRC, your manager, your partner, the solicitors and those around before you were born but..

Jon is right. No partner can declare a taxable profit on their Personal Tax Return when the partnership as a whole has made a loss and no partner can claim a taxable loss when the partnership as a whole has made a profit.

Of course that is just the tax position, they are free to provide as much pre-allocation salary as they like regardless of whether they end up with some partners making profits and others making losses.

Gem7321

Thanks for the advice I will raise it with the partner and manager when I go back to work in May. But the partner is not declaring a profit in their TR when the pship has made a loss, just stating a pre-allocated salary of £500 in the capital account in the accounts. Is that OK?

AK002

Gem7321 wrote: »

Thanks for the advice I will raise it with the partner and manager when I go back to work in May. But the partner is not declaring a profit in their TR when the pship has made a loss, just stating a pre-allocated salary of £500 in the capital account in the accounts. Is that OK?

That's what i thought you meant too

deanshepherd

Gem7321 wrote: »

Is that OK?

Yep, no probs. Sorry - I jumped into the thread half way down..

Jon1

Yes, I thought you were talking about the year end profit/loss split. Its perfectly acceptable to take drawings in a loss making company.

Thanks
Jon