Final answer:
The allocation of partnership income is determined by the partnership agreement, which defines how profits and losses are shared amongst partners, with differences in handling between general and limited liability partnerships.
Step-by-step explanation:
The allocation of partnership income refers to the way in which a partnership divides its earnings among its partners. In general, partnerships delineate the division of profits and losses in a partnership agreement. Profits may be distributed in proportion to each partner's investment or may be allocated based on the partners' agreement, reflecting their individual contributions or other agreed-upon terms. In a limited liability partnership (LLP), the liability of the partners is typically limited to their investment in the business, protecting their personal assets from being seized to cover business debts.
Limited partnerships and general partnerships handle profit sharing and liability differently. In a general partnership, all partners share the responsibility for the business and are also liable for the actions of the other partners. On the other hand, in a limited partnership, silent partners or financial partners only share in the profits up to the amount they invested, without participating in the business's management or being held accountable for its debts beyond their contribution.
The agreement also addresses what happens to the allocation of profit when there are changes in partnership, whether by the departure, death, or addition of new partners, which can affect the continuity of the business structure and its financial dealings.