How are Partner's Compensated - Explained
How Partners Earn Money in a Partnership
Written by Jason Gordon
Updated at September 25th, 2021
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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.
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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.
Related Topics
- Uniform Partnership Act
- Uniform Limited Partnership Act
- Partnership Agreement
- At-Will Partnerships
- Responsibilities of Partners to the Partnership
- Silent Partner
- Funding the Partnership
- How are Partners Compensated
- Splitting Equity in an Industrial Partnership
- Terminating the Partnership
- Types of Partnerships
- What are the main characteristics of a General partnership?
- Tort Liability of General Partner
- What are the main characteristics of a Joint venture?
- What are the main characteristics of a Limited partnership?
- Family Limited Partnership
- Master Limited Partnership
- What are the main characteristics of a Limited liability partnership?