I have a new partnership, they are brothers and are 50/50 on the partnerhip. The are Independent contractors, and just started the business on 8/29/06. If one drew out $9150.00 and the other only took 7525.00, do these go under Guaranteed payments or Distributions (in put on the K1 directly)? Thanks my mind is fried I think. ..... THank you ..................
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It can be either a draw against the capital account, or it can be a guaranteed payment. It depends upon their partnership agreement, which can simply be an oral agreement between the two. It all depends on how they see it.
Keep in mind that a partnership does not have to worry about the strict one class of stock rules of an S corporation. Making un-equal distributions will not threaten the partnership status, as it would threaten S corporation status. The partners are basically free to do it anyway they want, provided there is some economic offset for the unequal distributions, meaning in the end they each get 50% of the economic value of the partnership. They can’t, for example, take unequal distributions forever without some kind of make up provision, and still remain 50/50 partners.
Chances are these two do not have an elaborate scheme to make special allocations of special items to each other. More than likely, they are taking a draw based on the level of work each is doing. If that is the case, then I would suggest it be done through guaranteed payments. If it is not based on the level of work each is doing, I would suggest they do distributions at the end of the year to get each back to equal status. Without a specific plan in place in their partnership agreement, they can’t let special allocations go beyond one year. -
Guaranteed partner payments are like wages, they are an expense to the business and income to the partner. By classifying as such, the capital accounts are kept equal. They are also used in the formula to allocate Self Employment income.
As Bees mentioned, how you approach it depends on the situation.
DanComment
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One more thought - guaranteed payments do not help their basis however. Bottom line income does.JGComment
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Partnership Draws
Thank you for everyone's help.Comment
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