Questions

What are best practices in splitting up the business profits between to partners?

When combined skills equal sponsorship dollars and production versus talent and marketing

2answers

Hi there. I help people buy and sell businesses and also do a lot of consulting for people with partnership issues.

Your question seems to ask what percentage of ownership should go to each initial shareholder when setting up a company. You can choose to do this in a number of ways.

Some people keep it simple, they go with 'percentages' of ownership. This can make it difficult when the idea of new partners or investors comes up.

A second, more sophisticated, approach would be to look at the value of what each is bringing as an 'investment.' For example, if each is investing a year of labour, what is that worth? A nominal share value can be used and shares issued based on this investment.

This helps to distinguish between what is invested and what is earned in the form of wages or salary. For example, if one partner contributes $50,000 in cash and does $20,000 worth of labour for which he draws a wage and the second partner simply donates $50,000 worth of labour, then both have equally contributed to the equity of the company even though only one has given cash.

Business owners need to distinguish between what their 'job' is in the business and their role as owners. Think of what if would be like to work in a large corporation while also owning some shares. Your day-to-day would be all about your job and the wages you earn. Your activities as a shareholder would be about setting strategic direction.

When I help partners get going we always have to put an organizational chart and job descriptions in place to keep people on track with what they do every day vs. what they do as owners. This helps to determine the value of the invested equity as well.

Watch this video to get a further idea of how shares work in a business: https://youtu.be/1EjKjSAd1F8

Please arrange a call if you'd like to discuss your specific situation.

David Barnett


Answered 4 years ago

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