Partner Compensation

There is more than one way to make money from a partnership. There is, of course, the distribution of income that the partnership actually earns. But there are also guaranteed payments that can be written into the partner contract. For both general business and tax reasons, this is an important factor when establishing the terms of a partnership.

Imagine yourself as a member in a business partnership; your role is to run the daily operations of the business. The partnership offers you the choice of the following two types of compensation: guaranteed payments or distributive income shares. In a business year in which both types of income would be of the same dollar amount, identify the reasons why you might choose one type of compensation over the other. Explain and justify your reasoning.

Hint: The tax implications can be significant.