Profit Distribution in a Limited Partnership. How to Distribute Profits in a Limited Partnership?

Profit Distribution in a Limited Partnership. How to Distribute Profits in a Limited Partnership?
Michał Wasyl

Michał Wasyl

Tax advisor

Profit distribution in a limited partnership is one of the key aspects of its operation. It is a moment that provides both general partners and limited partners with benefits for their capital involvement. What is the profit distribution process, and what should you consider? Here is a comprehensive guide.

Table of Contents

How does Profit Distribution in a Limited Partnership Work?

Profit distribution in a limited partnership follows the provisions outlined in the partnership agreement. The agreement must comply with the applicable law. The basic principle is that all partners are entitled to a share of the profits. However, this distribution is not always proportional to their capital contributions.

The rules for distributing profit may vary depending on the partner’s role. A limited partnership consists of two types of partners:

  • general partner – i.e. a partner responsible for the company’s obligations with all his or her assets,
  • a limited partner – i.e. a partner responsible for the company’s obligations only up to the amount of the contribution made.

It is worth noting that profit distribution in a limited partnership depends on several factors:

  • the content of the articles of association,
  • the principles set out in the Commercial Companies Code,
  • contributions and other arrangements.

Distribution of Profit in a Limited Partnership During the Year – is it Possible?

Distributing profits during the year is possible, but there are some limitations. In the case of an advance on profit, specific rules must be followed. Both limited and general partners can request an advance on profit if it is provided for in the partnership agreement. Furthermore, it is only possible if the partnership has generated a profit.

Advances on profit in a limited partnership require approval by the partners. It should be executed under the partnership agreement. A key consideration here is the partnership’s financial liquidity. The profit withdrawals should not threaten it.

Conditions for profit advance in a limited partnership

  1. the partnership has generated profit,
  2. the advance payment has been approved by the partners,
  3. the partnership’s financial liquidity is maintained,
  4. provisions in the partnership agreement allow distribution
Profit distribution in a limited partnership

Distribution of Profit and Liability of Shareholders

If no other profit-sharing rules are outlined in the agreement, it is assumed that the profit is divided proportionally to the capital contributions.

The distribution of profit in a limited partnership may look as follows:

  • General partners may receive a larger share of profit in exchange for a higher degree of risk,
  • Limited partners may have smaller profit shares but their liability for the company’s obligations is limited

Example of profit distribution:

Type of partnerContributionLiability for the company’s obligationsPercentage share
of profit
General partner100,000 PLNLiable with all the assets60%
Limited partner 150,000 PLNLiable up to the contribution30%
Limited partner 250,000 PLNLiable up to the contribution10%
Example of profit distribution

Note: The final profit distribution in a Limited Partnership must comply with the partnership agreement. The profit withdrawal should not threaten the partnership’s financial liquidity.

Profit distribution in a limited partnership

What Should You Know Before Deciding on Profit Distribution in a Limited Partnership?

Before distributing profits, a limited partnership must meet certain conditions to avoid risk. The financial statements must show that the partnership can distribute profits without threatening its operations.

The key aspects are:

  • a thorough check of the partnership’s financial status,
  • financial liquidity analysis,
  • approval of the distribution by the relevant authorities.

The partnership should also consider potential tax liabilities. Profit distribution is subject to taxation at both the partnership and partner levels. Therefore, it is important that the company has secured funds to cover potential tax liabilities.

What are the Alternatives to Profit Distribution in a Limited Partnership?

If partners opt not to distribute profits, they can allocate them to the partnership’s development. Profits can be reinvested to grow capital, strengthen market position, or fund new projects.

Profit distribution in a limited partnership

Profit Distribution in a Limited Partnership – Summary

Profit distribution in a limited partnership requires compliance with certain rules. Both limited partners and general partners should be aware of their share in the profit, liability and financial consequences of the withdrawal. It’s also worth considering alternatives, e.g. reinvesting profits for long-term benefits.

Do you have questions about the distribution of profit in a limited partnership? Consult our experts and find out how to best manage your company’s finances. Contact us today!

FAQ – Profit Distribution in a Limited Partnership

Is it possible to withdraw profit during the year?

Yes. It is possible to distribute advances on profit, provided the partnership has generated a profit and the partners have agreed to it.

When can profits be distributed in a limited partnership?

Profits can be distributed after the annual financial statements have been approved.

How is profit distribution in a limited partnership taxed?

Profit distribution is taxed at the partner level and may also have tax consequences for the partnership.

Can general partners have a higher share of profit than limited partners?

Yes, if the articles of association provide so, the general partners may have a higher share of the profit.

Are limited partners liable for the partnership’s obligations?

Limited partners are liable only up to the amount of their contribution.

What are the conditions for paying an advance on profit?

An advance can be paid if the partnership has generated a profit and the payment does not threaten its financial liquidity.

Can you withdraw profit without a financial statement?

No, the financial statement is the basis for the distribution of profit.

Is it possible to reinvest profit instead of withdrawing it?

Yes, profits can be reinvested, which may contribute to the partnership’s further development.

What happens when a limited partnership has no profit?

If the partnership has not generated a profit, the partners cannot distribute it.

What are the consequences of distributing profits without partner approval?

Distributing profits without partner approval can lead to a breach of the partnership agreement. It can lead to potential legal conflicts.

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