Hi guys, really confused and need your help in this;
Company established 2 years ago with 3 partners each paid 33% of initial capital (in capital accounts), one of the partners is leaving and he will take his initial capital + his 33% of 2 years company profit, a new (4th) partner is entering instead, but the new partner will only pay the leaving one his initial capital + 40% of his 2-year profit, while the 2 original partners are gonna pay the rest of the leaving partner’s profit.
What would be the best way to record these payments/changes in Manager, knowing that naturally; the original 2 partners will end up with more % share in the company than the new entering one because they will participate in paying the leaving partner’s profit.
You will notice that each partner contributed different amount, but differences are considered more of lending and will be withdrawn later, the profit % is equal between original 3 partners regardless of their contribution at any given time.
Receive his contribution to the bank account and post to his capital account and pay the leaving partner from the bank and post to his contribution account
As it stands the figures in the capital accounts do not show who owns what share
It looks like you should use journal entries to attribute the annual profits to the appropriate capital accounts instead of accumulating them in one account
That would seem to make it clear who is entitled to what
These two statements are directly contradictory. The initial partners did not each pay in 33% of initial capital (assuming there have been no further contributions or drawings).
While I was writing this, @Joe91 said most of what needed to be said. But I’ll summarize my observations in one place:
Capital contributions and loans should definitely be accounted for separately. It may be possible to sort things out strictly through capital account balances, but only if records and memories are perfect. It sounds like some of the financial relationships may be informal, which is never a good thing in a partnership. Contributions of capital should be accounted for as such. Loans the business is obligated to repay, no matter who they are from, should be accounted for as liabilities, not capital account differences. Your description sounds like many naive partners who assume everything will go well and all promises will be remembered. Partnership agreements are needed not for the good times, but for when the business struggles and partners argue.
Initial contribution shares and distribution of earnings are two separate things. Your partnership agreement may stipulate equal division of profits, but that is independent of how much capital each partner contributed. So you should have properly recorded contribution of capital and separately accounted for any loans. Then, you should have made any distributions of earnings in accordance with the partnership agreement so capital not needed for current operations was lodged in members’ capital accounts rather than Retained earnings.
You need to determine whether the new partner is buying the former partner’s capital account or being added as a new partner. In the first case, there is nothing to record in Manager except the change in name of the account owner. One person has simply bought another person’s investment in the business. The new partner takes over the capital account and inherits the original partner’s share of future distributions of earnings. In the second case, you should make any distributions of earnings—to all members—from Retained earnings as the original partners jointly feel is appropriate, maintaining whatever working capital is necessary. Then, you should pay the departing member’s capital account balance to them. The incoming partner would be created as a new partner, making whatever contribution of capital the remaining partners agree is necessary to obtain the targeted partnership interest.
You seem to view this situation as a single, integrated process. But it is not. It is a series of discrete steps, some involving the original three partners, some involving the remaining two original partners, and some involving the surviving three.
Depending on your local laws, this series of transactions may actually constitute dissolution of the original partnership and formation of a new one. Local legal and accounting opinions about this should be obtained. You may need to wind up the affairs of the first partnership and start a completely new business in Manager. If the partnership survives the transition as a legal entity, all financial transactions affecting capital account or loan balances should be handled as individual transactions in Manager. Any purchase of partnership interest by the new partner from the old should happen outside of Manager.
You are right, initial capital paid equally, then 2 partners added more to support the business but all agreed to withdraw excess amount once funds available from profit, I’m sure this was not the optimal way to record these amounts, I said partners paid 33% in my first post to make things easier for the reader.
No “Retained earnings” distributions occurred in the past, there was an internal agreement that profits in the first 2 years should be reinvested to support growth, but issues happened and led to one partner leaving. From what I see, we could have distributed earnings into capital accounts equally but kept the funds within the business, just a record of how much each partner owns in terms of $ combining capital + profit.
The new partner is not buying the whole share of the previous partner (33%), he will be buying around 22% of the whole business, leaving other original partners at 39% each.
To move forward, I thought of making a journal entry where I move the capital of the leaving partner to partner 4’s capital account, and make another journal entry where I move 40% of the leaving partner’s profit to partner 4, and 60% of the leaving partner profit goes equally to partners 1 & 2. Now here is the tricky part; the profit will be paid in installments (12 months) to the leaving partner, assuming the leaving partner’s profit is 100,000, the new partner will give monthly payment of ~3,333 to the leaving partner from his pocket money, while the original 2 partners will pay 5,000 each for the leaving partner on monthly basis (60% of the profit), those 2 partners are going to pay those 50,000+5,000/month in total from the bank account of the business, how will this affect the new partner? (if it does), and how to record those 5,000 + 5,000 installments in Manager?
We consulted a lawyer, local laws does not impose us to dissolve and start a new company, we can continue working as usual with the new partner.
Do you have any idea how incomprehensible that sounds? If money is going to be paid from the business to the departing partner, they are not paying anything. The departing partner is making drawings. This is going to have no effect at all on the new partner.
Your issues are not about using Manager, which is what this forum is about. These are questions to resolve with an accountant. Whatever the accountant advises you to do, Manager will be able to record it. But Manager is only a tool. You need to know what you are trying to accomplish before you can use it.
This would be the completely wrong thing to do, as the leaving partner’s entitlements become a liability to the partnership not a contribution of capital by the remaining or new partners.
If you are not going to dissolve the first partnership and create a second partnership then you need to clean up the current transactions so there is transparency and remove all the conflicts you currently have. Dissolving and recreating the partnership would be far simpler.
So going back to the beginning - 3 partners each paid 33% of initial capital.
Lets say that was 10,000 each and that was posted to their capital accounts.
Then you have - each partner contributed different amount, the differences are considered more of lending. Therefore being lending contributions they should have only been posted to Liability accounts as they aren’t capital contributions.
Next we have the Retained Earnings. Even though it was agreed not to make actual distributions there would still be bookkeeping distributions. Let say the Retained Earning is 300,000, so 100,000 to each partner’s capital account balance which will now be 110,000. Also let say the whole business is worth 330,000 (initial capital 30000 + retained earnings 300,000)
The leaving partner’s capital account balance (110,000) now gets transferred to a Liability account, NOT other partner capital accounts, as they have a debt with the partnership until paid…
The new partner’s capital contributions are banked into their own capital account and then those funds are used to settle part of the leaving partner’s liability account, the balance is settled via the business bank account payments.
You CAN’T transfer the 60% of the leaving partner’s retained earning to the existing partners capital accounts as they AREN’T making any capital contributions. That 60% is being paid via 5,000 monthly payments from the business bank account, so it’s business funds not partner funds being used. For example, if the partnership had a bank loan, repayments are not partner contributions. Therefore the leaving partner, until paid, is providing a loan to the business.
What is most difficult with your example is that the figures provided just don’t add up.
You state that the leaving partner’s profit share is 100,000 which will paid via:
“New partner will give monthly payment of 3,333”, which gives 40,000.
“The original 2 partners will pay 5,000 each on monthly basis”, which gives 120,000.
So collectively they will be paying 160,000 to settle the 100,000.
Also, you state that the new partner “will be buying around 22% of the whole business”, yet they will be paying for 40% of the retained earnings.
Thanks @Brucanna for your input, dissolving the partnership and starting a new one was the best option but we couldn’t pull this off as it felt like we need to get rid of the Manager business records and start fresh which would remove all history and receivables, maybe we didn’t think about this enough.
Regarding the capital payment by the new partner, it makes perfect sense, but what I don’t understand is the profit distribution, regardless of the numbers I shared previously, say the profit of the leaving partner is 100,000, the only monthly amount the new partner can pay is 3,333, whatever remains will be paid/covered by the other 2 partners, it is not actually going to be a new contribution by them, rather it would be amount paid from their coming months’ profit, or deduction from their current profit share.
Is there a formula to pay the leaving partner’s 100,000 profit over the coming 12 months with only 3,333/month new money coming in from the new partner? regardless of the final % share of each of the 3 partners.
You definitely do not need to do this. You can have as many businesses as you want, whether you use the desktop, server, or cloud editions. Keep the old business. Add a new business with starting balances matching the ending balances of the old business.
I hope that worked for us, but we faced many issues, a lot of custom fields in customers were not imported using the Copy Clipboard function, same goes for sales invoices, since multiple salesmen are getting the sales and we created custom fields to sort them out, we’re talking about around 1,500 invoices, and around 500 customers, also 80% of payments & receipts are through future Cheques in which we have them as pending transactions with multiple custom fields as well like CHQ serial number, due date, etc. payments are receipts are close to 2000 which make copy/paste functions almost impossible. All of that will be lost moving to a new Manager account or we have to keep going back and forth between accounts checking previous data which will still affect the business for at least a year.
I don’t know if there is any easier way to move to a new account and take all these info along, but then what would be the point of moving!
You are actually mixing up several different aspects which aren’t related and getting them into an un-processable knot. Now it’s impossible to untangle that knot with words so lets start a new.
The leaving partner participates in a profit distribution which is worth 100,000. If that partner stayed in the business then they could have got paid that distribution from business funds.
When the partner leaves the business, then their capital account is transferred to a liability account and that liability (capital contribution + any lending funds + unpaid distribution) is still payable from the business funds, because that is what the business owes the partner.
Now with the new partner, they are “purchasing” a 40% share of that liability account, in effect, transferring it from the leaving partner to themselves, by depositing funds into the business for crediting to their capital account and the business then using those funds to pay out the leaving partner.
As for the remaining 60% you have two options:
a) the business uses it own funds to pay out the remaining liability, or
b) the remaining partners “purchase” the remaining 60% liability in the exact same way as the new partner, deposit funds into the business for crediting into their capital accounts and those funds then used to pay out the leaving partner.
How the existing partners get those funds is irrelevant. It could be from their back pocket, or taking drawings from the business which they re-deposit, which is what you are kind of suggesting with “paid from their coming months’ profit, or deduction from their current profit share”. The thing here is, option b needs to be done by actual money transactions, not via some Journal process.
