Issuing Internal Shares

I read someplace about how issuing internal shares could be a good solution to equity division when contemplating bringing in a new partner. I am in a partnership business (general partnership, yet to be incorporated) with two other partners bringing the total to three. We have initially divided equity equally among ourselves as each contributed equally. We also share profit and loss in the same ratio, i.e. 33.3% for each partner after deductions of applicable appropriations.

In order to grow the business, however, it has become increasingly necessary to bring in a new partner to broaden our customer base and contacts - the incoming partner will be of assistance in this respect. In this regard, and given the fact that we run the risk of crowding the “100%” holding (or so I think?), would it be more applicable to instead issue internal shares to accommodate the new partner? If so, what exactly are the accounting ramifications in Manager from such an exchange?

Thanks in advance for your responses.

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Partnerships don’t issue shares. Corporations, stock companies, or whatever they are called under your local legal system do. Partnerships maintain capital accounts to record individual partners’ equity in the partnership. The percentages and resultant share of profits can be anything you want, as defined by your partnership agreement. So you would handle a new partner in the same fashion you set up the original partners, which you seem to have mastered.

Once partnerships get to the level of complexity you are approaching, it is often wise to consult an attorney to make sure you get things right under local law.

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The general rule when there is a change in the Partnership structure is that the existing trading partnership is dissolved and a new trading partnership is created - this enables the clear separation of the individuals position for tax purposes.

If the partnership of 3 had an operating profit of 3000, then that would be 1000 each, so if you added a 4th person then on day 1 of the new partner the profit share would be 750 each, so for the original 3 their income would be understated and for the 4th their income overstated.

Therefore, when the 4th is added, start a new business. It would also help to start a brand new bank account so that money owing to/from the old partnership can be kept separated and the contributions from the original 3 would be transferred from there…

@brucanna’s suggested approach definitely has merit. But some partnerships begin operations while more partners are sought to provide additional working capital. (Real estate investment partnerships often do this.) In such situations, the partnership agreement must explicitly lay out how to handle shares of profit, debt, etc. as new partners come onboard. Frequently, there are provisions for payout to original investors before distribution to later investors, etc. It can definitely get very complex in a hurry, particularly as regards taxation, since partnerships generally pass tax obligations through to the partners rather than paying tax directly. (Again, a matter of local law.) That’s why I suggested consulting an attorney. With all the complexity, winding up the first partnership and beginning a new one could be easier.

I certainly agree and this is definitely something I will pursue going forward into the new year because as you say, “It can get very complex in a hurry.”

For the time being, and for purposes of accommodating the incoming partner, I think dissolving the old partnership and reconstituting anew as @Brucanna suggests will serve to make everyone comfortable.

However, I would still like to get some know-how on the way to go about such an arrangement in Manager, theoretically assuming every aspect remains the same as stated previously, but the business is now incorporated. In short, how would such an exchange occur in Manager? What accounts would be needed to facilitate an incorporated business in Manager.

I realize my question may be ignorant of a great many things, but I just want to get some perspective so that when we engage specific professionals (Advocate or Accountant) I am not too much in the dark. Thank you for your valid insights.

Your question goes well beyond the scope of this forum. I recommend searching the web for any of the comprehensive accounting sites and gaining knowledge about incorporated entity accounting, issuance of shares, etc. However you decide to arrange things, Manager will handle it, but first you have to know what you want so you can ask relevant questions.

This certainly gives me peace of mind; I’d very much not like to hope from one system to another as I find Manager quite efficient. Thanks.

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You would operate your first partnership in Manager for the period there was 3 partners.
At the start date of the second partnership with 4 partners, create a new business in Manager.

By “incorporated” - do you mean a registered business name or the formation of a company ?

@Brucanna, yes, formation of a limited company. At the moment, it’s a general partnership operating under a registered business name.