I am studying Partnerships at the moment and have a question regarding Partnership salaries.
The text states that sometimes the PA provides for one of the partners to be paid a fixed salary but for part of this to be borne personally by one of the other partners and that part is not to be treated as a deduction from the amout of profit shared between the partners.
I am fine with the concept of this and how to work out the Appropriation Statement, but could someone explain to me why, or under what circumstances Partners would do this? What benefit would it have?
hmm, interesting scenario and I have only come across it a couple of times. The reasons for this vary, but in one case it was due to the fact that the partner had ceased to be actively involved in the running of the partnership but still had an investment and was still classed as a partner for a number of years. This guaranteed him the fixed income from his investment before profit was then split between the remaining active partners.
Another scenario was similar but the partner played a consultancy role, whilst not actively running the business, the fixed partner salary paid for his consultancy work.
Another reason was a new partner who joined but didn't make an initial investment. They agreed to sub him a fixed amount of which part was retained in the business in order to build up his investment and the rest he took as drawings.
I have a partnership client, three partners, two invested in the business, the third put some work in, opened up the shop and works in there but did not invest. The others agreed to a salary for him, now one of the others started to work in the business and he is taking salary,too but the third partner still only entitled for profit shares as he is not doing anything in the business apart from his initial investment. Silly agreement as after the other two took their salaries there is not going to be much to share...
Many thanks for replying. It did seem an odd scenario to me and probably not one you'd come across in real life much? I have worked for a couple of partnerships one of which didn't take salaries, just drawings and in the other the partners were all salaried.
