Guarantee of Minimum Profit to a New Partner

Guarantee of Minimum Profit to a New Partner

A guarantee means the surety of a particular amount of profits by one or more partners and in some cases by the firm. Sometimes, as per the agreement, a new partner can be admitted with a minimum guaranteed amount of share in profit while distributing the profits of the firm. In other words, a minimum amount of profit is guaranteed to a newly admitted partner even if there is no profit or his share of profit falls short of the minimum guaranteed amount. If an actual share in profits is less than the guaranteed amount, in that case, the deficit amount shall be borne either by the firm or by any partner as the case may be.

If the actual share in profits is less than the promised amount, then the deficit amount will be handled either by the firm or by any of the partners. Such a guarantee may be provided by the firm or one or more than one partner in the existing profit-sharing or in some other agreed ratio.

  • Guarantee by the Firm

When a minimum amount of profit to be credited to the new partner is guaranteed by all the partners/firms, we have to calculate, first the two figures: 1. minimum guaranteed amount and 2. new partner’s share of profit as per profit sharing ratio. Of the two figures, the higher one is credited to the new guaranteed partner. Then, the balance of profit will be shared by the remaining partners in their profit sharing ratio.

  • Guarantee by one or more than one Partners

When the guarantee of minimum profit to the new partner is provided by one or more than one partner, firstly, we have to calculate the share of profits among the partners as if there is no guarantee. Secondly, if the share of the new partner is less than the minimum guaranteed amount, the deficiency is to be fulfilled by deducting the original share of partner/partners who gave the guarantee.

 

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