Salaried Member: Disguised Salary: Profit share: Unexpected events
The test for Condition A is applied at the start of the relevant period on the basis of a realistic view of the facts known at that time, and the expected outcome based on the arrangements in place.
Obviously events may not turn out as expected. The test is not re-run until the end of the relevant period unless the relevant arrangements are changed before the end of the period
This example illustrates the position where the outcome is not as expected at the time when Condition A was applied and this is due to events that are beyond the control of the LLP or the relevant member.
BBB LLP is a new fund management venture. The members agree to provide seed funding of £1m while new, unconnected, investors are being sought.
B is a member of BBB and is responsible for raising the funds. The LLP documentation says that he is entitled to a first preferential profit share of £100,000 each year including the first year, which will be paid irrespective of the profit and will not be refundable. He will also be entitled to a third of the total profits, which are expected to be substantial from year 3 onwards. It is agreed that the remuneration package will be reviewed at the end of year 4.
In year 3, the funds have not been raised and the LLP is dissolved.
B fails Condition A as the arrangements are not ones where, at the date when the test is carried out, it is reasonable to expect that B will be primarily rewarded by Disguised Salary over the relevant period.
The outcome was that B received purely a salary, but was not the intention and was not the outcome that was expected when the arrangement was entered into.