Some LLPs use a “benchmark” 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.
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 £100,000. At the start of the period, they award themselves ’salaries’ of £20,000, £40,000 and £40,000 respectively and agree that the actual total profit will be shared in proportion to those “salaries”. If the overall profits of the LLP are more or less than £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 “salary”.