Partnership - What is the difference between a GP’s drawings and profit?
The first thing you need to understand is that there’s no legal difference between you and your business. Legally, you and your partners are the business.
A partnership is a business that is owned and managed by more than one person. All partners are jointly responsible for all aspects of the business and are entitled to a share of the partnership profits. The amount of profit each partner is allocated is determined and agreed by a partnership agreement. If you don’t have a written partnership agreement, your partnership is governed by the Partnership Act 1890.
Each individual partner is set up with a current account through which profit is added and drawings are deducted. At the end of each account’s year, the working capital within the business for each partner is calculated.
What are drawings?
Drawings are amounts taken from the partnership, by each partner, normally monthly. They’re essentially the partners ‘salary’, a payment on account of profits earned. The drawings are a withdrawal of capital from the business and don’t affect the computation of profit, the only exception to this is if the partnership agreement provides for interest on drawings.
The amounts taken are recorded in a drawings account within the accounting records. Each partner will have their own drawings account and it’s essential that detailed and accurate records are kept of the drawings that are taken.
The amount drawn by each partner per month, like the profit shares, will be agreed in accordance with the partnership agreement. These will vary between partner and partnership depending on things like the number of partner sessions worked and the previously agreed profit-sharing ratios.
Other items that may be included in drawings are if the partnership pays the partners personal tax liabilities or professional subscriptions as well as superannuation contributions.
What is your income tax calculated on?
It’s important to point out that drawings aren’t a deduction against the partners taxable profits. Even if you take no drawings from the partnership for the whole year, the tax due on your profit share would be the same as if you had taken monthly drawings.
Income tax is assessed on your individual share of the taxable partnership profits. Your taxable profit isn’t always the same as the profit allocated to you in the accounts. This is because expenses like depreciation aren’t an allowable expense for tax purposes and so are added back to profits and instead the partnership is entitled to capital allowances. Examples of other expenses which aren’t allowable are legal fees incurred in relation to drawing up partnership agreements, property valuations and renewals of leases which exceed 50 years, entertaining, fines (for example parking fines) and donations to charity.
Any personal business expenses incurred that exclusively relate to the partnership business can be deducted from your share of the partnership profit to reach your taxable profit. These expenses are recorded as personal expenses. A business use percentage of capital allowances can also be claimed on any fixed assets purchased for use in the partnership like cars and laptops.
Your accountant will calculate the deductions when preparing the accounts and tax returns and you will be required to provide details of all expenses incurred throughout the year.
Unless the partnership pays for your income tax, you will need to save for your income tax from your partnership drawings and so it’s important that drawings are calculated accurately.
Should you have any questions or require any further assistance, please contact the office and we can direct your query to one of our specialists. You can find contact details on the Our People section of our website. Alternatively, call 0330 024 0888 or email firstname.lastname@example.org
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