Deficit Partner Capital Account Balances In a General Partnership Represent Liabilities
Example: Partners' capital position in A General Partnership with a deficit of -$397,000 allocated as follows to its partners:
Aunt 1 3,000
Aunt 2 3,000
Uncle 1 4,000
Uncle 2 3,000
Deficit General Partnership Equity -$397,000
Most state laws, including here in State of
Economically, it is necessary to also consider the 20XX acquisition which is "off-booked." So for example, if $1 million of the General Partnership assets were used to acquire the Sellers' interest, then the above liability to other partners may be equitable.
To the extent there is unpaid compensation due to Founder, it is necessary to carefully document those efforts contemporaneously so that if at some future windfall the Founder intends to receive those "wages," he/she can document years of efforts that were undercompensated and the amount due to him/her.
Compensation studies are available to assist with valuing such work. In defending against minority lawsuits alleging excess compensation, it is very important to maintain activity logs and a diary of activities. Such notes are also helpful in compiling annual reports to owners.
We recommend a historical reconstruction of Founder's capital account be undertaken in order to obtain a complete understanding of the components of her/his liquidation liability to all the other partners.
Nonproportional Distribution Trap!
As a general partnership, State law does not prohibit disproportionate distributions, however, it is important to understand the long-term consequences as eluded to above. At liquidation, the resulting uneven capital account balances which became out of sink with the tenant-in-common real estate holdings, represents a liability to be equalized to those predetermined ownership interests.
If you have any questions, do not hesitate to contact the professionals at Dana S. Beane & Company, P.C.
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