Capital account in partnership

[mknight]

Situation:
Fixed assets of a partnership include freehold of a property.
Partner A has £20k in his capital account; Partner B has £60k in his capital account;
Profit sharing ratio:- Partner A 70%, Partner B 30%

Question:
If the asset (the property) is sold, how should the proceeds be divided?

Is it 1) according to the profit sharing ratio [A 70 : 30 B]
or 2) according to the proportion of the the capital account the partner holds [A 20 : 60 B]

Also, is it correct to assume that the proportion of the capital account a partner holds reflects his ownership of the business? E.g. If i hold 90% of the total capital account fund, would i own 90% of the business as at the date of the balance sheet (bearing in mind the assets and liabilities are represented by the money in the capital accounts)?

With thanks in advance for any advice.

[Simon Sweetman]

The proportion of the business and assets that you own depend on what you have agreed. The "capital account" is just the record of your transactions with the partnership.

The Revenue would take the view that unless there is evidence of an agreement to the contrary the ownership would follow the profit sharing at 70/30.

simon.sweetman@btinternet.com

[mknight]

Many thanks for your response Simon.

1) Is the capital account not also a representation of how much money is presently invested in the business by each partner? (since it summarises all the money the partnership has)

2) The capital investment in the partnership was 50/50. The profit sharing ratio is uneven 70/30.
However, the property was purchased with the intention that it should it be held 50/50 and, to reflect this, the title deed is registered to 4 people (A+spouse and B+spouse).

N.b The property is held on trust for the partnership.

From that you say, it seems the property is no longer 50/50 between A and B. Correct?

3) Is the Profit-share ratio the 'partnership shares'?

Be grateful for your further clarification.
Kind regards

[mknight]

Sorry, just a quick follow up:

Can it be that the profit sharing ratio is 70/30 but the business ownership is 50/50 (based on the capital investment)?

Thanks again.

[King_Maker]

There is no need for the Capital Sharing ratio and the Income Sharing ratio to be identical.

What does the Partnership Agreement say on the matter? I suspect you don't have one - and this is an excellent example of why every partnership should have one. If not, I suggest you get some paperwork drwan up asap.

Maybe it's not a partnership asset at all? I have come across many partnerships where the premises are owned by only one (or several)partner. "Rent" or increased income % is charged to reflect this.