Parntership split in new business

[jclark12]

Hi guys,

So I am starting a new business which is a small take away, which will be launching soon. However I was just wondering how will I split the money.. A breakdown is below:

I have decided to open this take away, however I don't work in my town anymore and have appointed my brother to run the show (which he has accepted and is doing really well now with construction workers etc.). I am fully funding the project, sourcing materials etc etc, and he is just managing. I give me a brief every morning on what will happen for the day and he knows what to do.

When the take away opens, he will be there most of the time, managing and running the place and obviously I will be there too but no where near as often as him (maybe 3 months in total in the year).

I offered him a 15% share in the business with a salary too. However, I was trying to figure out, when do I give him the 15% (end of the year? every quarter?) and what does it come out of? I'd assume when he gets his 15%, I can also take 85% out for myself. But if this comes out of the profits, then there is no cash left in the business, or do I then leave cash in the bank (lets say 50%) and the remaining treat it as profit?

I know this is really stupid, but I'd appreciate help here and explain how I can go about this.

Many thanks guys!

[tallen]

The 15% and 85% is out of the business's net profit (after expenses, including the partner's and your own salaries or wages). If you decide that the business should retain some earnings, then the 15/85 would come out of whatever money the business chooses to distribute. You can decide when and how to make distributions, totally up to you.

[jclark12]

How much do businesses usually retain from net profit?

[tallen]

How much do businesses usually retain from net profit?

It all depends on the needs and wants of the owners! (and what they want for their business...)

[turboguy]

Just because someone owns 15% of the business does not mean that each year you must distribute that 15% of the profits to that person. It just means they are entitled to that amount. Often people prefer to leave that money in the business to help fund business growth. Salaries and profits are two different things. Salaries should be based on the time, effort and skills of the person and they of course do not need to be owners. I was in business for decades before I removed any profits from the business.

[tallen]

Consider Apple Computer, with hundreds of billions of dollars in "cash" reserves -- if you were a shareholder in that company, you could vote for directors who would distribute that money as additional dividends to the shareholders rather than having the company hold on to it, or you could vote for directors who would continue hold on to that money to help the company be in position to invest in the next big thing when it comes along, so that you can benefit from even greater profits (and/or appreciation of your stock value).

[jclark12]

Thank you very much guys, I appreciate all your input.

I think the best way to approach it would be to pay him a wage, and distribute profits at year end, however I'll retain some of the profits in the business based on expenses over the year and what I will need for atleast 3-4months + a bit more for other expenses.

Is that a good idea?

[BNB]

Look at it this way. You have salary from the business, this has nothing to do with equity share. You also take distributions. Meaning, you distribute funds from the account to the share holders. When you do this, I'm sure your brother would like his 15%. How much you take, when you take it, etc. That's all up to you based on the needs of the business. It could be May, business doing great, and you guys take a $10,000 distribution - $8500 for you and $1500 for him. In closely held businesses, especially, distributions often happen throughout the year. There are tax benefits to being paid by distributions and not salary, as distributions are not subject to payroll tax which is 15.3%. You should speak with an accountant about a strategy as there are requirements, such as taking a "reasonable salary", etc.

[jclark12]

Thank you very much BNB

[IgniteGOC]

These are great questions and some excellent responses!

As you've seen stated, the salary is the initial part of the deal. You yourself should also be paid a salary out of the business. You should also setup a salary for your brother.

Perhaps the equity share could be your way of an incentive for him to grow the business! Most often, equity shares are paid quarterly. I have some small stakes in businesses and some pay monthly (their preference), others pay quarterly. Quarterly is the most often used, as large companies post their earnings quarterly. (Publicly held companies are required by the SEC to publish quarterly, many small businesses take on this culture)

[Wash & Dry]

So what do you think.... is this another SHIP at the bottom of the ocean? We all know the only ship that usually doesn't SAIL is a partnership....

[Lewis-H]

In a business partnership, you can split the profits any way you want–if everyone is in agreement. You could split the profits equally, or each partner could receive a different base salary and then split any remaining profits. This will be up to you and your partners to decide.

[journalist55]

I would give him the 15% every quarter that way you can keep track of the money you are giving him more proactively and see if it works with your expenses as well.