If you’re entering into a new business partnership, you should decide how you’re going to split profits and losses between partners before you start making money. You don’t want to find yourself fighting over debts after the fact. The best way to avoid partnership disputes over profits and losses is by planning their allotment in your partnership agreement.
Without a partnership agreement in place, equal partners assume profits and losses equally. This might work in some cases, but partners with absolutely equal power risk running into a decision-making stalemate that could derail their partnership.
Partnership profits and losses are often distributed based on capital contributions and management responsibility. General partners take on greater personal risks and are often rewarded with greater profits to reflect their precarious position, while limited partners are shielded from liability beyond whatever they’ve invested in the partnership.
Technically, your partnership’s profit and debt-sharing ratios could be whatever arbitrary numbers the partners agree upon – as long as you specify the terms in your partnership agreement. Your arrangement should reflect the investments made and risks taken by each partner in the venture so that nobody feels shortchanged when it comes to profit distributions.
A qualified business attorney can help you weigh all of the relevant factors and come to a profit- and debt-sharing agreement that sets up your partnership for success.
How Can Partnership Profits and Losses Be Distributed?However you decide to divide your profits and losses, you should clearly lay out these terms early on in your partnership, ideally in your partnership agreement. Unless you specify otherwise, the law will generally divide profits and losses equally between equal partners.
Many factors can affect how a partnership splits its profits and losses. The amount each partner gets will depend first on whether they are a general or limited partner.
Examples of Profit and Loss Distribution in PartnershipsYour loss distribution and profit-sharing agreements make up two important parts of your partnership agreement. Ultimately, your partnership agreement should show a full picture of your business arrangement: the number of total partners, the responsibilities and contributions of each partner, and the liabilities each partner takes on.
Some common examples of profit-loss sharing scenarios may look like:
You can also revisit your profit-sharing and loss-sharing agreements as your partnership grows. You can always update these agreements to reflect changes in your business.
The best approach is to come up with a profit and loss distribution model that makes sense to you. It’s best to do this early on in your partnership, ideally with the help of a business attorney who has experience evaluating partnership contributions. Call the Philadelphia area offices of Holmes Business Law now at 215-482-0285 or use our contact form to get started.
Sarah E. Holmes is a Philadelphia business attorney and strategist that helps start ups and established businesses looking to expand, protect their assets and increase their profits in an approachable, down-to-earth way. When you're looking for a business lawyer in Philadelphia, the Main Line or New Jersey, we can help.
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