Which document outlines each partner’s share of profits and losses in a partnership?

The partnership agreement is the foundational document that outlines the specific terms under which a partnership operates, including each partner’s share of profits and losses. This document is crucial because it clearly delineates the rights, responsibilities, and expected contributions of each partner, providing a framework for decision-making and profit distribution.

While Schedule K-1 does report each partner's share of the partnership's income, deductions, and credits to the IRS, it is generated based on the terms set out in the partnership agreement. Form 1065 is the informational return that partnerships must file, summarizing the income, deductions, and other financial information of the partnership as a whole, also derived from the details stipulated in the partnership agreement. The IRS manual provides guidelines and regulations but does not specify individual partner arrangements. Therefore, the partnership agreement is the key document that directly addresses how profits and losses are allocated among the partners.