Distribution terms in a partnership agreement need special consideration. While distribution of profits is mostly welcomed, terms relating to allocation of debts and losses are usually vague and do not have other specific tax requirements. However, distribution and allocation terms should not be mixed; only receipts and other assets should be distributed rather than profits or revenues. For example, there is big difference between distributions to partners and payment of fees to partners in terms of tax purposes, and the provisions governing payment should be separate from distribution clauses. There should also be a tax distribution provision that includes an obligation to return tax distribution under certain circumstances. The partnership agreement that permits partner withdrawal should also include necessary allocation of income or loss.

See Sean Bryan, “Cashing Out of a Partnership – The Joy of Distributions”, JD Supra Business Advisor (November 11, 2014).

Posted by Jiaqi Wang, Associate Editor, Wealth Strategies Journal