How should we account for guaranteed payments owed to the partners?

Thanks for the tips.  I've altered our CoA so that guaranteed payments are an expense, while 'Guarantee Payments Owed' is a (other current) liability.

One thing about recording guaranteed payments owed as a liability is that they show on both cash-based and accrual-based reports.  Is that appropriate?  I feel like deferred guaranteed payments should not show on cash-based reports.

That's an interesting idea, although I'm not sure it will work for us:  Our partners's guaranteed payments are unequal - proportional to their labor/service to the company, not to their ownership.  Some partners receive no guaranteed payments because they provide no services to the company.

Reinvesting the guaranteed payments would change the balance of equity in the company, something we'd like to avoid (and governed by special provisions in our operating agreement anyway)

It does not seem like a consensus has been reached here. The scenario at the top seems to say that the Guaranteed Payment is categorized in an expense account and unpaid amounts are accrued in a liability account. This seems logical to me. It is not clear to me if the first answer is in agreement with this method because of the later discussion of the equity accounts.

At our startup, we are faced with the same scenario as discussed above. We make guaranteed payments to accommodate a disparity in work effort relative to partner interest stake. In other words, the partner doing all the work makes a living wage before distributions are made to the partners that include silent investing partners.

Everything would work fine if a Guaranteed Payment was actually guaranteed in a startup company but it is not. The problem with all the internet chatter on this matter is that the definition of Guaranteed Payments is always copy/pasted without a discussion of what happens when you can't make a full payment. If you copy paste the definition, the language states that the payment is made regardless of profit or loss. This works if you have investors that make up the difference during the period of a net loss on the P&L. When a startup is living on a cash basis and there is no cash, the bank account does not allow for a negative number. The solution is that the partner who should be getting a Guaranteed Payment (GP) defers the payment.

I understand the desire, however, to record the deferment in order to keep track of the sacrifice one partner is making. At a later date, that partner should have the option to either receive his deferred GPs ahead of partner distributions or dissolve the debt.

From an accounting perspective, I don't see any legitimate way to classify the deferred payment as a capital contribution or people would say that their GPs are $1M/mo but they can only pay $10,000/mo so the remaining $990,000 is a capital contribution. This would sure be a great tax benefit on the sale of the company.

An equity draw seems to be a common discussion and the concept of three equity accounts, but it really does not address the purpose of Guaranteed Payments to account for partners with a disparity in effort relative to interest stake.

So in the end, here is my problem. If you don't record the full GP as an expense on the P&L you don't have a clear picture of the companies performance. In other words, you can artificially make the company look like it is breaking even by shifting an unpaid GP to a liability account. While I agree that one should base performance on all three statements, the P&L speaks very loud and it is difficult for silent partners to understand why they are not getting distributions when the P&L is black.

If you record the GP in full but don't actually pay the GP, the partner who should have received it will have great heartburn on tax day.

For me, this long discussion supports the original question/statement of method. My question is to ask, where I am going wrong?