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ITTOIA/S863B (3)

Some LLPs use a 鈥渂enchmark鈥� approach to allocating profits. In these cases it is important to look through the words used and take a realistic view of the facts and decide whether it is simply a means of allocating a share of the overall profit.

Example

This example illustrates the interaction between priority profit shares and the Condition A test.

A, B and C expect that their LLP will make a profit of about 拢100,000. At the start of the period, they award themselves 鈥檚alaries鈥� of 拢20,000, 拢40,000 and 拢40,000 respectively and agree that the actual total profit will be shared in proportion to those 鈥渟alaries鈥�. If the overall profits of the LLP are more or less than 拢100,000, then each partner will share in the deficit or surplus in proportion to their agreed salary.

It is important to take a realistic view of the facts and look at the substance of the agreement. Although they describe these sums as salaries, they are not in reality fixed amounts. Instead they have a method of sharing out the anticipated profits. The amounts are simply set out as a benchmark for allocating profits. The reality is that the members will receive a share of profits that varies by reference to the overall profits of the LLP. It is not relevant that the LLP has chosen to describe this arrangement by reference to a 鈥渟alary鈥�.