Selling Partnership Interest With Negative Capital Account In Nassau
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FAQ
What is the preferred method of resolving a partner's deficit balance, ing to the Uniform Partnership Act? The partner with a deficit balance must contribute personal assets to cover the deficit balance.
If any members of a partnership have a negative capital account, that partner is legally obligated to restore their deficit, also known as a DRO (deficit restoration obligation).
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.
The partner with a deficit contributes enough assets to offset the deficit balance. The deficit balance is removed from the accounting records with only the remaining partners sharing in future gains and losses. The other partners file a legal suit against the partner with the deficit balance.
A DRO requires a partner to restore any negative balance (deficit) in their capital account upon the liquidation of the partnership. The DRO demonstrates the partner's willingness to assume the economic risk of loss in the partnership.
How to zero out partner capital accounts in a final year Go into the Input Return tab. From the left of the screen, select Balance Sheet, M-1, M-2 and choose Sch M-2 (Capital Account). Scroll down to the Distributions section. In the field Other decreases (-) (Ctrl+E), enter the appropriate amount.
A Deficit Restoration Obligation is an obligation by a partner in a partnership (or a member in an LLC taxed as a partnership) to restore the negative balance in its capital account when the partnership liquidates.
