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.

Answer preview

A partnership is a form of business unit, formed through an agreement between two or more people to undertake business, and cooperate in advancing their mutual interests in achieving their mission governed by a contract (Aaronson, 2011). The parties in a partnership may be businesses, individuals, interest-based organizations or governments. A partnership unit is not a discrete unit from its owners and profits and losses pass through to the owners based on their agreement. Partners can either earn a guaranteed payment or distribution of income depending on the partner contract while considering taxation of income and reasons for the business.

I am a member of a business partnership with a role of running the daily operations of the business. I will choose guaranteed payments…

 

(500 words)