Partnership - Share of Profit question

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awwallace22
awwallace22 Registered Posts: 35 Regular contributor ⭐
in General accounting discussion
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:

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  • AK002
    AK002 Registered Posts: 2,492 Beyond epic contributor 🧙‍♂️
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    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
    Gem7321 Registered Posts: 1,438 Beyond epic contributor 🧙‍♂️
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    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
    awwallace22 Registered Posts: 35 Regular contributor ⭐
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    Thanks guys for your input, much appreciated
  • Jon1
    Jon1 Registered Posts: 11 New contributor 🐸
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    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
    Gem7321 Registered Posts: 1,438 Beyond epic contributor 🧙‍♂️
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    It's called a pre-allocation of profit or salary rather than a profit share
  • Jon1
    Jon1 Registered Posts: 11 New contributor 🐸
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    How can you have a pre allocation of profits if the partnership has made losses.

    Thanks
    Jon
  • Gem7321
    Gem7321 Registered Posts: 1,438 Beyond epic contributor 🧙‍♂️
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    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
    Jon1 Registered Posts: 11 New contributor 🐸
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    Wow I've had to get the leg out.

    please see ITTOIA (2005) s850
  • Gem7321
    Gem7321 Registered Posts: 1,438 Beyond epic contributor 🧙‍♂️
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    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
    deanshepherd Registered Posts: 1,809 Beyond epic contributor 🧙‍♂️
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    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
    Gem7321 Registered Posts: 1,438 Beyond epic contributor 🧙‍♂️
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    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
    AK002 Registered Posts: 2,492 Beyond epic contributor 🧙‍♂️
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    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
    deanshepherd Registered Posts: 1,809 Beyond epic contributor 🧙‍♂️
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    Gem7321 wrote: »
    Is that OK?

    Yep, no probs. Sorry - I jumped into the thread half way down..
  • Jon1
    Jon1 Registered Posts: 11 New contributor 🐸
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    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

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