How are Partner's Compensated
How Partners Earn Money in a Partnership
Written by Jason Gordon
Updated at July 1st, 2021
- Marketing, Advertising, Sales & PR
- Accounting, Taxation, and Reporting
- Professionalism & Career Development
-
Law, Transactions, & Risk Management
Government, Legal System, Administrative Law, & Constitutional Law Legal Disputes - Civil & Criminal Law Agency Law HR, Employment, Labor, & Discrimination Business Entities, Corporate Governance & Ownership Business Transactions, Antitrust, & Securities Law Real Estate, Personal, & Intellectual Property Commercial Law: Contract, Payments, Security Interests, & Bankruptcy Consumer Protection Insurance & Risk Management Immigration Law Environmental Protection Law Inheritance, Estates, and Trusts
- Business Management & Operations
- Economics, Finance, & Analytics
- Courses
Table of Contents
How are Partners Compensated?What is a Partner's Special Allocation?What is Phantom Income in a Partnership?How is a Partnership Taxed?Academic ResearchHow are Partners Compensated?
Partners do not receive a salary from the partnership. Rather, the partners are compensated by withdrawing funds from partnership earnings. Partnerships are flow-through tax entities. As such, any profits or losses produced by the partnership pass through to the partners. This is known as that partner's distributive share.
Back To: BUSINESS ENTITIES, CORPORATE GOVERNANCE, & OWNERSHIP
What is a Partner's Special Allocation?
By default, partners share equally in the profits or losses of the partnership. The partners may allocate profits and losses as they desire through the partnership agreement. The only limitation is that there must be an economic reason (substantial economic effect), other than tax avoidance, for the special allocation of profits or losses.
What is Phantom Income in a Partnership?
In some cases, the partnership may retain any earnings. In this case, the partners are still responsible for paying taxes on the earnings as if they had received it as income. This is known as phantom income.
How is a Partnership Taxed?
Though the partnership is not a taxable entity, the partnership must still file an informational return to the IRS. The partnership produces K-1 forms that provide owners with information regarding their share of partnership profits or losses. The owners use the K-1 to report these profits or losses on their personal income tax returns.