Professional Practices Part 3 – Profit Sharing Regime and Capital structures
Profit sharing in professional partnerships is perhaps the most emotive issue in such a practicing life and the larger the partnership the more difficult. This programme addresses the types of regime and recognises that in most partnerships perhaps the only thing that partners look at at the end of the year is how much they can draw on their current account and how their draw compares with their peers!
We look at “Howard’s four slices” of the cake – interest on capital, fixed share, performance pool and dividend – and how each should be allocated.
We then turn to the capital structure and perhaps controversially for an accountant Howard’s preference for a “meaningful balance sheet” on which to base a partner’s capital contribution and to determine the “right” level of borrowing from the bank.
Finally we consider the structure within which to operate – unlimited partnership, LLP or Limited Company and the tax issues surrounding each – with a suggestion that LLPs are perhaps best for typical collegiate type practices and limited companies for the volume-based and process-driven practice, with an option to have a hybrid structure with a Limited Company being a member of an LLP.