Have A Plan
As a partnership member, your compensation comes in distributions and guaranteed payments. A distribution is a payment based on a particular percentage of profit each partner receives as outlined in a partnership agreement. The distribution is not deductible by the partnership. A guaranteed payment, on the other hand, is defined by the IRS as: “Payments made by a partnership to a partner that are determined without regard to the partnership’s income. A partnership treats guaranteed payments for services, or for the use of capital as if they were made to a person who is not a partner” (Publication 541).
These payments do not have income taxes withheld in the way a salary does, but are a deductible business expense. The partner who receives it will have the amount reflected on the K-1 and will report it on a personal return. These amounts will be subject to self-employment taxes.
So how should you distribute partnership income?
This discussion should happen when the partnership is first established. The following are things in the agreement to include:
• Division of income/losses. This includes both the division of profits and losses and how and when each partner will get paid.
• Contributions to the partnership. If either partner contributes any assets to the business, you’ll need to ensure these are documented.
• Business decision-making. What authority does each partner have to make business decisions?
• Business Dissolution. How can you plan a smooth transition?
• Management Responsibilities. Which partner is in charge of important tasks like payroll, media selection, and more?
Work with a lawyer to develop and formalize your agreement to ensure it is thorough and fully functional.
If you find yourself asking for more information, we’re happy to help. The CPA’s at Tri-State Accounting & Tax Services can help you finalize your strategy and partnership plan. Give us a call at 513-791-6288.