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Partnership agreements: Planning for profit and loss

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WHEN setting up a business as a partnership, or revisiting your partnership agreement for any reason, it is important to consider the core topic of how profits and losses will be shared.

Tom Bodkin.

‘There are various options for sharing profits and losses, so it is paramount that you sit down with your co-partners to discuss these options and seek advice from a solicitor to determine the best approach for your business,’ says Tom Bodkin, a partner with Borneo Martell Turner Coulston in Northampton. ‘The topic of profits and losses is at the heart of your partnership agreement, so it is very important to get it right.’

Tom discusses some of the options for calculating the distribution of partnership profits and losses, and highlights some of the pros and cons for each option.

Common models for sharing profits and losses

Equal sharing

The most simplistic of all the models, and one that mirrors the basic provisions of the Partnership Act 1890, is ‘equal sharing’. This simply means that all profits and losses are shared equally amongst the partners, irrespective of any other circumstances.

Proportionate sharing

This model is where each partner’s share of profits and losses simply mirrors their capital contributions to the partnership. It is in many respects a fair and equitable model, as the distribution reflects the degree of financial risk assumed by each partner.

Pot A and Pot B sharing

In this distribution structure, you have two different ‘pots’ at the end of each financial year, Pot A and Pot B. You can state the proportionate sizes of each pot in your partnership agreement – the two pots could be equal or different sizes. The idea is that all the partnership profits are paid into those pots in the proportions agreed. Pot A is then shared, usually equally, amongst all the partners. Pot B is shared, again usually equally, onlyamong those partners who have hit their target for that financial year.

How we can help

If you are looking for advice regarding profits and losses distribution among your partners or require legal support with regards to your partnership business more generally, then our lawyers will be pleased to help.

For an informal conversation, please contact Tom Bodkins in the corporate and commercial team on 01604 622101 or email

This article is for general information only and does not constitute legal or professional advice. Please note that the law may have changed since this article was published.

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