Partnership Profits

• When a partnership earns a profit, the owners of the partnership determine whether they want to reinvest these profits into the business or collect them as personal income. Whatever they decide to collect as personal income gets allocated to the various partners according to a prearranged ratio. For instance, upon forming a partnership, two partners may agree that Partner A receives 60 percent of the profits that they do not reinvest into the business and Partner B receives 40 percent. Partners may agree on this apportionment according to their specific situation. It usually depends on the value of capital, resources and labor each partner puts into the business.
  
  

Partnership Salaries

• A salary is a specific amount of money an enterprise agrees to pay an employee for labor. According to the Internal Revenue Service, the owners of a partnership cannot be employees of their partnership. If one partner is involved in the daily operations of the enterprise while the other is not and he feels that he should receive compensation for this labor, he should receive that compensation by increasing the percentage of net profits that he receives as personal income. Only the employees of partnerships, who are not owners, may receive salaries.
  
  

Set Partnership Income

• In some cases, partnerships may decide that each partner will receive a specific amount of profit from his contributions to the partnership rather than a percent of net profits, with the understanding that the rest of the partnership's profits will go back into the business. Partnerships often do this with the intent of bringing home enough money to pay personal expenses while continuing to build up the business, possibly with the intent of selling it off at some point in the future. Even though such partnership disbursements result in a set amount of money similar to a salary, the Internal Revenue Service does not view them as salaries.
  
  

Other Legal Structures

• The rules for owner salaries that apply to partnerships do not necessarily apply to other legal enterprise entities. For instance, the Internal Revenue Service requires S Corporations to pay a "reasonable salary" separate from shareholder disbursements to any shareholders who engage in the daily operations of the business, treating those shareholders as employees as well. The Internal Revenue Service taxes this salary separate from shareholder earnings.