One of the benefits of joining the LLP is you will be entitled to join the business’ profit share. The profit share rewards the team for exceeding profitability targets. The usual model is that 20-30% of profits over an agreed budget are distributed to the team in proportion to drawings. The profit share is usually distributed quarterly, bi-annually or annually, depending on the business. The reason the profit share is business-wide and is linked to business performance, not individual performance, is that it reminds people that everyone in the business has a role to play in making the business more profitable and that they can then benefit from that.
To add a layer of confusion, when LLP members record income from the LLP on their tax return, it is described as a Profit Share from the LLP. However, this figure doesn’t represent money LLP Members are due, it represents money which they have already been paid. LLP Members are paid drawings (see below) and these are not recorded on personal tax returns. What is recorded is the LLP Members’ allocation of the profit from the LLP Accounts. The aim is always that the LLP Profits will match the drawings, but in some cases, the profit share figure will be lower or higher than expected. This could be for several reasons and will depend on the business.
Drawings are paid to LLP Members on a monthly or weekly basis, depending on the business. The net drawings which LLP members receive are calculated using the PAYE calculation to ensure that LLP Members are in the same net position as they would have been had they not joined the LLP. It’s important to note that drawings are not taxable income, so should not be included on personal tax returns. Drawings are paid by the LLP in expectation of the LLP making a profit (as above). However, if the LLP doesn’t make the required level of profit to cover the annual drawings which the LLP member has been paid, then these drawings are NOT owed back to the business.