Splitting profit with business partner

[eddie269]

I know many people have asked this questions but looking for ideas also.

I have one other business partner joining me. Here are the details of the partnership:

- $120k total to start, we are both investing $60k each.
- I'm majority owner at 51% stake and he's at 49%. I have final say in major decisions.
- Business will be open 40 hrs/week.
- I will work 40hrs / week (5 days) full time
- Partner will stay at his current business full-time and work 8hrs/week part time at our business.
- S-corp (if that matters to anyone)

Now I have tried to research ways of paying us fairly but couldn't find much.

Our accountant proposed that we have the same set salary per year (i.e. $30,000/yr each) and the remaining profits leftover, we can divide that amongst hours work per year (i.e. I'll avg 40 out of 48 hrs worked per week at 83% of final profits and he'll avg 8 out of 48 hrs worked at 17% of final profits)

We will use our time sheets to determine final hours worked.

We can split profits quarterly, twice a year, or yearly but that can change as business grows.

Any suggestions, opinions, input would be greatly appreciated.

[Paul]

It’s always difficult to figure out what is “fair” in these situations,especially when the investors are also the employees.
What we typically do is the reverse of your accountant’s idea. We try to separate the investment from the work.

In other words, we treat the investment as if it was ONLY an investment regardless of who works in the business. Then we pay the “employees” as if they were only employees and not also investors.

The theory is that if you both invested the money and neither of you were going to work the business then you would be paying out salaries and then sharing the profit. Instead you simply pay yourselves the salary.

Of course you can tweak and adjust and inflate the salaries you pay yourselves to best serve your purpose. You can devise bonuses, commisions and other variations also. You can "adjust" compensation for any particular "non-cash" added value such as special skills, contacts or knowledge.

[Harold Mansfield]

That's my suggestion. Pay yourself the salaries that you would pay someone else for working there out of the businesses operating expenses.
Seems simple to me. Your accountant's formula seems a little over complicated. But then again, I'm not accountant.

[eddie269]

Thanks guys. That was my original plan when I first thought of the business and had no partner. It actually keeps it simple and makes the most sense!

I was going to pay myself and staff an hourly wage and at end of the year, the profit would be all mine (minus what I would reinvest back into the business).

[Fulcrum]

Thanks guys. That was my original plan when I first thought of the business and had no partner. It actually keeps it simple and makes the most sense!

I was going to pay myself and staff an hourly wage and at end of the year, the profit would be all mine (minus what I would reinvest back into the business).

So why not simplify things and just open the business yourself without the partner?

As to your initial post, many of the numbers just don't make sense to me. Why pay a 40 hour/week salary to the partner only putting in 8 hours/week (can I have that $75/hour job?;)) There are others that I'm not following but that's just me nitpicking.

I realize that this is a basic plan, but I can almost guarantee that you will have to change from this very early on.

Both Paul and Harold are 100% right with their suggestions. Use the KISS principle for onsetting this up and running the business. Treat all initial funds as investment seed money and repay equally, pay a reasonable wage for actual work performed and tell the accountant he needs to brush up on keeping things simple.

[eddie269]

So why not simplify things and just open the business yourself without the partner?

As to your initial post, many of the numbers just don't make sense to me. Why pay a 40 hour/week salary to the partner only putting in 8 hours/week (can I have that $75/hour job?;)) There are others that I'm not following but that's just me nitpicking.

I realize that this is a basic plan, but I can almost guarantee that you will have to change from this very early on.

Both Paul and Harold are 100% right with their suggestions. Use the KISS principle for onsetting this up and running the business. Treat all initial funds as investment seed money and repay equally, pay a reasonable wage for actual work performed and tell the accountant he needs to brush up on keeping things simple.

Point definitely taken. Thank you.