Guarantee of profit

Sometimes a partner (often a new or junior one) is guaranteed a minimum amount as their share of profit. The steps:

• Share the profit in the normal ratio first.
• Check the guaranteed partner's share against the guarantee.
• If it is less, the deficiency must be made good. If it is more, nothing is adjusted.

Who bears the deficiency?

• If all the other partners gave the guarantee, they bear it in their profit sharing ratio (unless another ratio is agreed).
• If one partner gave it, that partner alone bears it.

Example: profit 1,60,000, ratio 2:1:1, and Rahul (the third partner) guaranteed 50,000. His normal share is 40,000, which is 10,000 short. The others bear it in 2:1: 6,667 and 3,333. Final shares: 73,333, 36,667 and 50,000.

A partner may also guarantee the firm a minimum amount of fees or business. If the actual fees fall short, the shortfall is charged to that partner and credited to the Appropriation Account.