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Allocating Multiple Partner Salaries and Reimbursements

In January we formed an LLC Partnership with 3 people to form a janitorial service.  One of the partners already had contracts in place and was using his personal bank account (PBA #1) to receive payments and purchase supplies.  He was not using any accounting software.  Towards the end of January, we opened a new business checking account (NBA#2).  I created 3 separate bank accounts in QB Online so all income and expenses would reflect everything starting January 1st.  An additional account (NBA#3) was opened for unexpected expenditures.

 

Separate Vendor accounts were created for each partner so that reimbursements and wages could be paid using NBA#2 once it was viable for business use and NBA#1 would be no longer needed.  I was using this method until I discovered partners do not receive reimbursements.  These expenses should go through the Equity Account for Partner Contributions and Disbursements.  After watching a video online, I tried correcting my earlier entries by going into the original expense, reclassifying it as “Partner Contribution” with the minus sign on the bottom line and saving.  However, I don’t see any of the earlier reimbursement money to the partner showing up on my books or bank statement as their receiving money (or matching up).  Also, I don’t know if my profit and/or loss under Expenses is correct.  What was the best way to make this correction and starting forward how should I reimburse my partners and so that QB Online is correct?  I still have outstanding reimbursements for January and the early part of February to enter.

 

Also, 2 of the partners require income from the business for living expenses.  I listed them as Vendors and categorized the Expense as “Salaries & Wages”.  I recently discovered, partners can’t receive salary, only “draws”.  Partners should only take “Draws” or “Guaranteed Income” for living wages.  I don’t know how to move previous “wages” to “Draws” or “Guaranteed Income” and if that should be a subcategory of Partnership Contributions or Partnership Distributions.  These also need to be corrected.  Can you please help on this one also?

 

I’ve spent many hours trying to find a solution on the internet and in forums but keep getting confused.  In addition, I’m still in the process of reconciling PBA#1 bank account and don’t want to move forward until I’m on the right track.

 

Please help.

Solved
Best answer 03-08-2019

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Established Community Backer ***

Re: Allocating Multiple Partner Salaries and Reimbursements

Guaranteed Payments to a partner have to be spelled out in the partnership agreement. Then when you write the check for the guaranteed payment you use the guaranteed payment expense account you create in the chart of accounts. A audit, without that specification in the partnership agreement will cause that expense to be disallowed and that is a problem for all partners when you have to do an amended partnership return and so do the partners.


Partners are not vendors, make them inactive

 

Partners, when the partnership is formed, bring cash and maybe assets and sometimes receivables as part of their starting equity.  once that happens in forming the partnership, it is no longer a personal thing, it belongs to the partnership


The partnership is a business, it is not 3 people acting individually. Expenses are paid from business funds, no matter who does the actual buying, or who uses the supplies.


The partnership charges the customer and that amount is income to the partnership.


At the end of the year you complete the tax form 1065 and as part of that a form K-1 is generated per partner. That K-1 provides information on the partners share of income and expense per the partnership agreement on profit (loss) sharing.


During the year a partner can take a draw on equity. You write the check and use that partners equity drawing account as the expense for the check.


A good partnership agreement, IMO, will state a minimum balance required per partner equity account, and often require the total draws per year to not exceed last years retained earnings distribution or some percentage thereof.


For a company taxed as a sole proprietor (schedule C) or partnership (form 1065), I recommend you have the following for owner/partner equity accounts (one set for each partner if a partnership)
[name] Equity (do not post to this account it is a summing account)
>> Equity
>> Equity Drawing - you record value you take from the business here
>> Equity Investment - record value you put into the business here

 

7 Comments
Established Community Backer ***

Re: Allocating Multiple Partner Salaries and Reimbursements

Guaranteed Payments to a partner have to be spelled out in the partnership agreement. Then when you write the check for the guaranteed payment you use the guaranteed payment expense account you create in the chart of accounts. A audit, without that specification in the partnership agreement will cause that expense to be disallowed and that is a problem for all partners when you have to do an amended partnership return and so do the partners.


Partners are not vendors, make them inactive

 

Partners, when the partnership is formed, bring cash and maybe assets and sometimes receivables as part of their starting equity.  once that happens in forming the partnership, it is no longer a personal thing, it belongs to the partnership


The partnership is a business, it is not 3 people acting individually. Expenses are paid from business funds, no matter who does the actual buying, or who uses the supplies.


The partnership charges the customer and that amount is income to the partnership.


At the end of the year you complete the tax form 1065 and as part of that a form K-1 is generated per partner. That K-1 provides information on the partners share of income and expense per the partnership agreement on profit (loss) sharing.


During the year a partner can take a draw on equity. You write the check and use that partners equity drawing account as the expense for the check.


A good partnership agreement, IMO, will state a minimum balance required per partner equity account, and often require the total draws per year to not exceed last years retained earnings distribution or some percentage thereof.


For a company taxed as a sole proprietor (schedule C) or partnership (form 1065), I recommend you have the following for owner/partner equity accounts (one set for each partner if a partnership)
[name] Equity (do not post to this account it is a summing account)
>> Equity
>> Equity Drawing - you record value you take from the business here
>> Equity Investment - record value you put into the business here

 

Established Community Backer ***

Re: Allocating Multiple Partner Salaries and Reimbursements


@Rustler wrote:


For a company taxed as a sole proprietor (schedule C) or partnership (form 1065), I recommend you have the following for owner/partner equity accounts (one set for each partner if a partnership)
[name] Equity (do not post to this account it is a summing account)
>> Equity
>> Equity Drawing - you record value you take from the business here
>> Equity Investment - record value you put into the business here

 


I assume the 1st sub-account called just Equity is where you transfer the partner's share of the year's net income or loss from Retained Earnings, once the books are finalized at year end.  And also zero out the other 2 sub-accounts.Right?

So if the sum of draws less investments, is the same as the net profit, the balance in all the accounts will be zero. I know it's unlikely but in principle.  And the balance in Retained Earnings will be an offset to Net Income.  

Established Community Backer ***

Re: Allocating Multiple Partner Salaries and Reimbursements


@Malcolm Ziman wrote:

@Rustler wrote:


For a company taxed as a sole proprietor (schedule C) or partnership (form 1065), I recommend you have the following for owner/partner equity accounts (one set for each partner if a partnership)
[name] Equity (do not post to this account it is a summing account)
>> Equity
>> Equity Drawing - you record value you take from the business here
>> Equity Investment - record value you put into the business here

 


I assume the 1st sub-account called just Equity is where you transfer the partner's share of the year's net income or loss from Retained Earnings, once the books are finalized at year end.  And also zero out the other 2 sub-accounts.Right?

So if the sum of draws less investments, is the same as the net profit, the balance in all the accounts will be zero. I know it's unlikely but in principle.  And the balance in Retained Earnings will be an offset to Net Income.  


Yes the account named equity by itself is where  you post his share of retained earnings

and you roll up investment and drawing to that account too

 

the balance, at the start of the year after the roll up

equity, $$$$$$$

drawing, 0

investment. 0

RE, 0

 

The balance in retained earnings is distributed.

Frequent Contributor *

Re: Allocating Multiple Partner Salaries and Reimbursements

Thank you very much for both of your prompt and understandably thorough replies. I believe I’m on the right track when a business has multiple partners involved in a service industry business.  Just a few more questions to make sure I understand your replies. 

 

  1. Our partnership agreement placed a specific dollar amount certain partners would receive bi-monthly during the course of the year as long as business was profitable. However, if it is better to use Equity Drawing, to avoid an amended partnership agreement in the future, I can use the Equity Drawing Account.  This might be a better alternative if the business profits cannot sustain the Guaranteed Payments.

 

  1. After I make the partner vendors inactive, can I re-categorize the expenses already listed in the vendor account, so they are reflected/moved to the correct account (i.e., Equity Drawing)?

 

  1. Should I edit and re-categorize items in the Banking Register so they match up or will QBO perform that action automatically?

 

  1. Create the following for Each Partner. Afterwards, am I correct in understanding:

 

  1. Equity (Never post to this account)

 

  1. Drawing (withdrawals/payments made to partner)

 

  1. Equity Investment – record value you put into the business here.

This will remain zero until the end of the year and is only used if personal investment funds are deposited.

 

  1. At the end of the year will Investment = % of Partner’s Share of Net Income, if no personal money was invested throughout the year? And do I manually enter a $ amount based on the partner’s share of Net Income?

 

I truly appreciate the time you have taken to assist me in obtaining a clear understanding of Equity Accounts that affect multiple partners in a partnership.  I never realized the importance or impact they have on the correct reporting procedures of partnership activities (draws, disbursements/reimbursements, and if investments are deposited).

Established Community Backer ***

Re: Allocating Multiple Partner Salaries and Reimbursements

The Net Income will still show so I would think RI should be the opposite, so the net of the two is zero.

Established Community Backer ***

Re: Allocating Multiple Partner Salaries and Reimbursements

net income on the balance sheet is this year

Frequent Contributor *

Re: Allocating Multiple Partner Salaries and Reimbursements

After many long hours, I was able to make all of the necessary corrections and new entries needed.  Everything balanced and was finally able to reconcile and close the books for January & February 2019!  Hopefully year-end won't be a nightmare.   I didn't realize the accounting principals for multiple partners could be so challenging.  This was my first time performing any type of accounting transactions to this degree, along with the fact I've never taken an accounting class.  It's a lot harder than a simple monthly excel budget spreadsheet used to manage small household expenses.  Again, Thank you so very much for your help.  It's truly, truly appreciated!