ratio for splitting of both partners

[zel43]

Hi, i'm totally new here.
Got courage to ask upon viewing a forum regarding partnership. Hence, we had some doubts right now how to proceed under the current situation. Furniture/tent rental company was bought 3 years back here in middle east. Partner 1 is the capitalist and decision maker/problem solver while partner 2 is supposedly the operating. for the last 2 years, business is not that much profitable hence industrial partner did not do his part well. although company still floating with the tangible assets around and some clients coming in from time to time. scenerio:
no partnership agreement has been signed/notified.


both verbally agreed only.
both partners did not took salary except partner 2 taking petty cash much as it includes personal expenses.
partly partner 1 received partial amount for the capital invested but again he has to put money if company needs such as license renewal, staff salary etc.


question are: how much should be the ratio for profit sharing?
does partner's need to have salary from the start?
for 2 years, P/L will show losses even now not unless all tangible assets will be liquidify. from both partners, who has the say in the company's decision making?

i know it a bit long, but hopefully we read a good advice.

thanks.

[Freelancier]

You're not profitable, so not sure why you're worried about "profit sharing". You don't take profits until you're profitable enough to support that.

Meanwhile, without any verbal agreement about this, the partners need to sit down and figure it out. In general, person providing the capital has taken the biggest risk, so gets the biggest reward.

[vangogh]

Welcome to the forum zel43. I always answer this question the same way in that the right split is the one all partners think is fair. If not one partner will inevitably resent the split leading to problems in the partnership. As for specifics, I think it's good to look to the future and what each partner will contribute. In your case it sounds like one partner is responsible for the finances and the other is responsible for working the business. That sounds like something where a close to 50/50 split is likely.

What you can do is create a list of all the things each partner will be responsible for in the business and how important each is to the success of the business. What will each partner do over the next year? Over the next 5 years? When you have the list of responsibilities and their importance, how much of the profit each partner deserves, will likely become clearer.

Also know you can work out an agreement that changes over time. It's possible that in the beginning the financial person contributes more, but a few years in, the operations person is more important to the success of the business. You can draw up an agreement that says the profit split favors the financial person for the first few years and then the split switches to favor the operations person. Or you could just agree to revisit the agreement every X years for a time.

Hope that helps.

[Business Attorney]

Both the law and the business customs with respect to partnership vary considerably between companies, so any comments are not based on fully understanding everything that may affect your situation.

There is no perfect ratio for sharing between partners. It depends on a lot of factors but comes down to two basic things -
- the value of the relative contributions (the capital from the capital partner and the services from the service partner)
- the relative bargaining power of the two partners - typically are the service partner's skills or relationships to customers or suppliers critical to the success of the business.

In the United States, the service partner does not need to receive a salary. That may not be true in your country.

In most states in the U.S. decision making in a partnership is by both partners. Either partner can bind the partnership, independent of the other partner. Again, that may not be true in your country.

David