Partnership Profit-Sharing Agreements

By Elizabeth Rayne

When two or more people decide to start a business for a profit, the resulting agreement is called a partnership, governed by state law as well as individual contracts. Following the creation of the business, the execution of a profit-sharing agreement is an important step in properly allocating profits and losses between partners and determining individual tax liabilities. If prepared properly, this written document will represent the true intentions of the partners. It does not necessarily need to be based on ownership percentages.

Ownership Interest

In the absence of a partnership agreement, the ownership interest in a partnership is split evenly among the partners. When ownership interests are equal, the profits and losses of the business are also shared equally. Unlike in corporations and limited partnerships, ownership interests are not automatically determined by the amount of capital each partner contributed to the business, although the partnership agreement may provide otherwise.

Partnership Taxation

Partnerships are responsible for reporting the income and losses of the business to the IRS. However, partnerships are not responsible for paying corporate income tax. Instead, each partner is allocated a share of the business profits and losses, which he reports on his personal income tax return. Instead of issuing a W-2 to each partner as businesses do for employees, partnerships distribute Schedule K-1, Form 1065, to each partner.

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Ownership and Distributions

Unless otherwise specified in a partnership agreement, the ownership, managerial responsibilities and profit distribution will all be equal among the partners. However, the partnership agreement may provide that the ownership percentage does not correlate to profit distribution. Unless otherwise provided by the agreement, the partners will share the losses of the partnership in proportion to the profits. Partnerships have the right to agree to profit/loss allocations that work for the business. For example, a partnership can allocate one partner more of the profits for the first three years of the partnership to compensate him for bringing an important relationship to the table

Profit-Sharing Agreement

A profit-sharing agreement is a written contract, signed by all partners, that specifies how profits and losses will be allocated to the partners. Generally, profit-sharing is a part of the partnership agreement, which will also specify the rights and responsibilities of the partners in managing the business. The agreement may also specify how much each partner is expected to contribute to the business, and how the partners may be compensated in their roles as managers. With a partnership agreement, partners may create a profit-sharing arrangement as simple or as complicated as necessary for the business.

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How to Prepare a Partnership Agreement

A partnership is an agreement between two or more people to engage in a business venture. Each partner agrees to contribute capital in the form of cash, assets, real property or effort to make the venture successful. Since partners share in the profits and losses of the company, preparing a partnership agreement setting out the rights and responsibilities of each partner is advisable.

Key Sections of a Partnership Agreement

A general partnership is an agreement between two or more people to go into business together. This type of organization is subject to state law and agreements between the owners of the business. In most situations, the partners can decide how they want to operate the business by drafting a partnership agreement, a set of rules governing business operations. If an agreement does not address a particular issue, the laws of the state where the partnership is headquartered will govern how the business is to act in those circumstances. As a result, a partnership agreement can be quite detailed. However, there are some key sections that can be especially important.

Steps for Dissolving a Partnership in South Carolina

Knowing the process for ending a general partnership can help partners effectively wrap up business affairs when it comes time. In South Carolina, the filing of dissolution paperwork with the state is generally not required. However, it is a good idea for partners to execute a written agreement regarding distribution of company assets and payment of creditors in the event of dissolution. Additional steps, including cancellation of professional licenses and permits as well as satisfaction of tax liabilities, may also be involved.

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