Partnership drawings

[Francis Jackson]

50/50 partnership. No partnership agreement. One partner has drawn more than the other. Should this be dealt with as follows:
1 Net profit minus combined drawings = balance then split 50/50 between partners
2 Net profit split 50/50 minus drawings divided between partners
3 All drawings be put in as wages
4 The partner that has received less be given more or the partner that has received more pay back so that both partners receive equal amounts.
Your thoughts please as to which one, or is there another option, and why.

 

[Paul Norman]

As there is no partnership agreement in place it is entirely up to how you agree, between the partners, to handle it.

The issue of what should be called wages, or drawings, will be a matter for someone who understands the tax implications, of course.

The amount each partner receives would normally be set out by mutual agreement at the outset of the arrangement, together with how that might change in time. It doesn't have to be equal - you might agree to split profits according to some other formula.

 

[John Hemming]

The issue of what should be called wages, or drawings, will be a matter for someone who understands the tax implications, of course.

If a partnership then profits are taxed on the basis of Self Employment. Drawings are then drawn against that and in essence a question between the partners. If one partner draws more than the profit that partner is entitled to then that partner is overdrawn.

In the end, however, not having a partnership agreement is perhaps the most urgent thing to correct.

 

[Francis Jackson]

As there is no partnership agreement in place it is entirely up to how you agree, between the partners, to handle it.

The issue of what should be called wages, or drawings, will be a matter for someone who understands the tax implications, of course.

The amount each partner receives would normally be set out by mutual agreement at the outset of the arrangement, together with how that might change in time. It doesn't have to be equal - you might agree to split profits according to some other formula.

If a partnership then profits are taxed on the basis of Self Employment. Drawings are then drawn against that and in essence a question between the partners. If one partner draws more than the profit that partner is entitled to then that partner is overdrawn.

In the end, however, not having a partnership agreement is perhaps the most urgent thing to correct.

Thank you. So, we are at the year end and this is the dilemma between the partners in the absence of any agreement. One partner has drawn more than the other but how this is calculated for personal tax purposes and fairness is complex. Also, where do these drawings come off in the calculation of the end of year accounts?

 

[John Hemming]

Even if there is no written agreement you will have to agree something. Probably best to get a written agreement in place as well.

 

[Scalloway]

where do these drawings come off in the calculation of the end of year accounts?

Partners' drawings do not get deducted in the Profit and Loss Account and are not an allowable deduction for tax. They are deducted from the individual partner's Capital Accounts on the Balance Sheet.

As a partner your share of the partnership capital is effectively your own money.