J. Thomas F. answered • 07/26/22
Ret'd college instructor, Accounting Principles and Business Law
It is the other way around. Net Income is distributed to the partners in accord with their partnership agreement. The Uniform Partnership Act presumes equality among the partners unless they agree otherwise; so, if one partner puts in $1,000,000 cash and the other partner works full time, no one gets interest or salary unless stipulated. In the case of agreement for salary and/or interest, net income is first distributed to those categories for each partner. There is no priority of interest over salary, or vice versa, unless stipulated. If there is insufficient income to cover salary and interest, then the distribution is pro rata. The remainder, whether positive or negative, is then distributed to the partners according to agreement. Basically, the remainder after salary and interest leaves the partnership, aside from payroll taxes, in the same position as if the cash had been borrowed and the salary had gone to an employee. Indeed, depending upon the agreement and the amount of income, it is even possible that one partner will receive a credit to his/her capital while the other will be debited.
