Partnership Special Allocation Agreement

Partnerships are a popular business structure for companies that operate with two or more individuals. In partnership, the profits and losses of the business are shared between the partners. However, sometimes partners may want to allocate profits and losses differently than their ownership percentage. This is where partnership special allocation agreement (PSAA) comes in.

A partnership special allocation agreement is an agreement between partners that allows them to allocate the partnership’s profits and losses in a manner that is different from the ownership percentage. The allocation can be based on different factors such as the amount of capital invested, the level of participation in the business or any other agreed upon criteria.

PSAA is a tool that enables partners to allocate profits in a way that reflects their contributions to the partnership. For instance, if one partner invests more capital than the other, they may want to allocate more profits to themselves. Alternatively, if one partner has more experience and is more involved in running the business, they may want to allocate more profits to themselves as a reward for their effort.

The PSAA can be used to allocate losses as well. If the partnership suffers a loss, the partners may want to allocate the loss in a way that reflects their contributions. For example, if one partner is responsible for a loss due to negligence, they may agree to take the brunt of the loss.

PSAA must be carefully drafted to ensure that it complies with tax laws. The Internal Revenue Service (IRS) requires that the allocations under PSAA have economic effect, which means that they must reflect the economic reality of the partnership. Moreover, the PSAA must not be used to circumvent tax laws.

PSAA can be used to achieve different objectives. For example, it can be used to provide incentives to partners, increase their level of involvement in the business, or to equalize tax benefits. Whatever the objective, the PSAA must be written in a way that is clear and unambiguous.

In conclusion, partnership special allocation agreement is a powerful tool that allows partners to allocate profits and losses in a manner that reflects their contributions. However, it is important to note that PSAA must comply with tax laws, and must not be used to circumvent them. If you are considering PSAA, it is important to seek the advice of an experienced attorney to ensure that it is drafted in a way that is legally sound.