General partnerships in the United States, in most cases, are not required to be registered with a state, as corporations or limited liability companies are. Partnerships are governed by either a state's partnership laws, which are a version of the Uniform Partnership Act, or by the partners' specific partnership agreement. How profits are shared is covered in the state laws and, if not changed by the partnership's particular agreement, the partnership will be governed by them.
When considering how profits are shared in a partnership, the partners must remember that the partnership is not separate from them when it comes to taxation. Unlike a corporation, which is considered a "person" by the law and pays its own taxes, the taxes of the partnership are placed directly on the partners and will be paid on the partners' individual income tax returns.
Proportion or Agreement
By default, per the Uniform Partnership Act, the profits and losses are shared equally among the partners. The partners must consider whether they wish to maintain the equal sharing of profits or whether they wish to alter it in proportion to their contributions. Some partners provide capital or property and others time--these factors can be accounted for in the partnership agreement and reflected in how the partners share profit.
Initially, and without a partnership agreement, all profits and losses are shared equally. Even though this is the default, losses may be allocated by agreement in the same way that profits can be reallocated. Losses, however, do not need to be allocated in the same proportion as the profits, and the partners should consider this in deciding how to share profits. If a partnership has three partners--A, B and C--then A can receive 50 percent of the profits, and B and C can each receive 25 percent of the profits; but A can be subject to 10 percent of the losses, with B and C each subject to 45 percent of the losses.
In order to receive profits, the partners must determine how the profits will be paid. Generally, partners can choose to take a draw when there is a profit or wait until the end of the year to receive a payment. The difference is that if the partners receive a draw on the profits when there is a profit, this may be infrequent and erratic--which may also lead to partners making additional contributions in bad months. If the partners wait until the end of the year to be paid, the profits can sit in the partnership's operating account be paid at the end of the year when profits are known--eliminating the need to make additional contributions.
- Photo Credit handschlag image by Dron from Fotolia.com
How Are Profits Split in an LLC?
An LLC has the flexibility in most states to design a profit sharing method that meets the needs of the business. Ownership...
How Are S Corporation Profits Divided?
An S corporation is a "pass-through entity" for purposes of federal taxes. This means that the Internal Revenue Service allows the S...
Profit Transfer Agreement
Under German law, a subsidiary giving up profits to the parent company isn't an ordinary business transaction. It's typically covered by a...
How to Form a Partnership Business & Split Profits
A partnership based on assumptions about profit-splitting is risky. A written agreement on how the money is divided is a safer course.
Entrepreneurship: How to Divide Profit & Loss
One of the hardest questions to resolve when you're setting up a business with one or more partners is how to split...
What Is a General Partnership Agreement?
A general partnership agreement is a contract that defines the rights, duties, responsibilities and liabilities of the partners in a general partnership...
Pros & Cons of a Limited Partnership
A limited partnership allows for limited liability and no self-employment tax, but role uncertainty and setup restrictions are drawbacks.
Partnership Profit-Sharing Agreements
A partnership can be created on a handshake, as long as at least two parties verbally agree to do business together and...