In a partnership agreement is there any laws or rules on how each partner gets paid? And if one partner needs to take out a large draw does there have to be a distribution between both partners?
Great question – we’re actually working on a series of articles that include this issue – so be sure to check back!
The IRS generally doesn’t recognize the right of partners partnership (or members in an LLC) to pay themselves a salary. Partners can receive guaranteed payments to reimburse them for services or the use of capital. However, these payments aren’t tied to income of the partnership. Any other money they take out of the partnership is considered a draw.
To my knowledge, there is no requirement that a distribution is provided to all partners whenever one partner takes a draw unless stipulated in your partnership agreement. This can actually lead to a misalignment between distributed profits and tax liability if one or more partners take more or less than their share of the partnership’s profits. This is because tax liability in a partnership is based on the partnership’s net income and each partner’s percentage ownership, without consideration for their respective draws over the course of a year.
If you’d like to establish rules governing partner draws or distributions (which is a pretty good idea) the partnership agreement is the place to do so.
Hope this helps,