A partnership is an association between two or more people to jointly own and operate a business for the purpose of profit. Partners contribute to start the business, and decide on how to run it to achieve its objectives. There are several factors that determine how the profits and losses will be shared in the partnership.
Capital is the amount contributed to start up the partnership. Often, partners in a partnership agreement contribute different amounts of capital. Consequently, they may decide to share profits according to the size of their capital contributions. For example, if partner A contributed $600,000 and B contributed $400,000 and they share profits according to their capital contribution proportions, then A will receive 60 percent while B will receive 40 percent.
Some partnership agreements stipulate the level of liability for each partner. One partner may have limited liability up to the amount of capital contributed while the other may have unlimited liability. In this case the partner with unlimited liability is compensated for the liability he bears. For example, A and B are partners with equal capital contributions, but A has unlimited liability while B has limited liability to the extent of capital contributed. Then A may be compensated by receiving a higher profit share.
Partners with equal capital contributions and liability may have different levels of responsibilities. Often, some partners are fully involved in the daily running of the business while others' roles are limited to contributing capital and making occasional strategic decisions. In this case the partner involved in the running of the business will receive a higher profit share as a reward for the time and energy spent.
In the absence of a partnership agreement on how profits will be shared, the issue is governed in 34 states by laws based on the Uniform Partnership Act, a model statute endorsed by the National Conference of Commissioners on Uniform State Laws. The Act requires equal sharing of the profits and losses among all partners regardless of capital contribution proportions, liability or responsibility.