Although not legally required, every partnership should have a partnership agreement in place. The agreement will specify when and how income from the partnership may be distributed. For example, distributions may be determined by how much each partner contributes to the startup fund, an even ratio among all partners, or the distribution may take into consideration the amount of time each partner devotes to the LLP. The agreement may also specify how assets will be distributed if the LLP dissolves. Drafting an agreement at the time the partnership is formed will avoid conflict among the partners as the business grows.
Types of Distributions
There are three scenarios where a partner may take a distribution from the LLP. A partner may withdraw money in anticipation of the current year's earnings, or he can withdraw money from the current or previous year's earnings, if the funds are not needed for day-to-day operations. The partners will vote on the timing of distributions and how the income should be divided, if these issues are not spelled out in the partnership agreement. A third form of distribution involves assets that are distributed to partners upon dissolution of the partnership.
All LLPs must maintain financial records. The records will show how much each partner contributed to the startup money for the business and how profits have been distributed. The LLP should maintain a financial record for the partnership as a whole as well as capital accounts for each partner showing individual contributions and distributions.
LLPs do not have to pay business income tax to the IRS; instead, partners must report income from distributions on their personal income tax returns. If distributions exceed the money a partner originally paid into the business, he may be liable for additional taxes on the capital gain. The business will generally file a partnership return with the IRS, listing distributions made to each partner during the year. Schedule K-1 must be distributed to each partner showing his share of the LLP's income, deductions and credits for his personal records.