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Use of Guaranteed Payments in a Partnership

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Partnerships are allowed to deduct guaranteed payments to partners for services rendered or use of capital without regard to partnership income or profit and loss sharing ratios.

What kind of situation would make guaranteed payments a logical way of starting a two-person partnership?

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Solution Summary

The referenced 569 word solution provides seven types of situations where the use the guaranteed payment can be beneficial to an entity.

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Following are some examples of situations where the use of guaranteed payments is used:

1. If one of the partners is basically a silent partner while the other partner works the business, it is a good example where a guaranteed payment can be used. Often the silent partner is the one who invested funds or transferred assets to the new entity. The one who works the partnership business may feel entitled to a "wage" that a guaranteed payment can provide. In both cases, each partner is contributing to the partnership: one with assets and the other with services.

2. In the same view, the working partner may be paid based on performance such as commissions to which the silent partner is not entitled. Remember that guaranteed payments are cash basis (meaning the working partner actually got the cash).

3. Because the guaranteed payments are subject ...

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