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Partner Equity account or loan account

Should this be recorded as a partnership equity account or loan account

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Partners 1& 2 put £5000 into a personal account as the business account was not open, started to purchase items for the business. Currently these figures are showing as capital investment in the partner equity account. 

The partnership agreement reads:-

The initial capital shall be in the form of a loan of £xxx from 1&2 to the partnership and the partnership shall use their best endeavours to repay this as quickly as possible.

The business is now closed, nothing has been repaid and there are no funds in the bank. 

Should this be showing as equity or a loan within the liabilites

Replies (12)

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By Calculatorboy
22nd Jan 2022 13:42

It doesn't really matter , so no liquid funds to repay it, I'd just have a capital account analysed by partner where profits, capital drawings etc are posted , the partners can do anything they want ( change the agreement etc) provided they all agree

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By [email protected]
22nd Jan 2022 14:15

Thanks for your reply. They are however going after the other 2 partners for the funds. Would you consider this making a difference

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By Calculatorboy
22nd Jan 2022 21:47

Don't know who "they" are but if a creditor of the partnership all partners are jointly and severably responsible for all partnership debts ...for example if you are an equity partner with 25% profit share a creditor can still pursue you for 100% of the partnership debt ..this is basic law that all qualified accountants are schooled in

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By D V Fields
22nd Jan 2022 14:31

So four partners two of whom were required to put in a loan?
Did the partnership use its best endeavours to repay this loan as quickly as possible as specified in the partnership agreement?

If it may get messy then I would stick to exactly what the agreement states rather than allow the accounts to misrepresent the agreement (regardless of how trivial it may seem).

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By [email protected]
22nd Jan 2022 15:07

partners 3 & 4 ran the partnership (pub & restaurant) and during covid closures tried to run a delivery service which partners 1& 2 objected to and refused them entry to the pub. So whilst they tried to earn to pay partners 1&2 stopped them trading. Its all very messy and their not talking to each other. What would you suggest? Put the £5 K in as a loan of leave it in the partners equity account
Partners 1&2 were the only ones to inject capital.

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By Tax Dragon
22nd Jan 2022 15:16

You told us the agreement said "The initial capital shall be in the form of a loan". Isn't that enough said?

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By Catherine Newman
22nd Jan 2022 17:31

I agree Tax Dragon but if partners 1 & 2 prevented 3 & 4 from making a go of it, how can they go after 3 & 4 and for £5K, is it worth it?

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By Catherine Newman
22nd Jan 2022 17:33

I agree Tax Dragon but if partners 1 & 2 prevented 3 & 4 from making a go of it, how can they go after 3 & 4 and for £5K, is it worth it?

The drawings of partners 3 & 4 do need to be looked into.

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By Tax Dragon
22nd Jan 2022 17:51

Those are of course (the) pertinent questions.

But presumably they've all been asked - and answered - long before the OP (was) posted here.

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By Calculatorboy
22nd Jan 2022 21:53

It doesn't matter if its shown as a loan or capital.. all partners are jointly and severably liable for all 3rd party debts ...but frankly from the OP ramblings ..it sounds like a crock of sh#t that is best avoided by any accountant and left to the solicitor vultures who are welcome to the mess created by partners who can't sort their differences out amongst themselves

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By D V Fields
22nd Jan 2022 19:04

I would stick with adhering to the partnership agreement. Sounds like partners 3&4 would settle for it being equity as there will be nothing to distribute and all things being equal, no liabilities to settle. As the loan, then partners 1&2 have some gripe over non payment and presumably some redress through the courts if they could prove some form of negligence; even if fruitless.

If you treated it as equity how would respond to partners 1&2 if they challenge the (apparent) fact that the partnership agreement clearly stated loan and they invested on that basis? By doing what the paperwork says you remain impartial as you should.

Obviously there may be more to it but that would be my stance unless further facts suggest otherwise.
Good luck.

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By Calculatorboy
24th Jan 2022 23:23

Tell them to stop acting like children and sort it out amoungst themselves..otherwise the first instalment of legal fees will make their loans look like chicken feed

Then take a back seat until they pay your costs to date

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