First timer here--Need help with partnership agreement

[Rogen]

Hi All,

I'm going into business with someone and need guidance. I will gladly provide more info if needed. See below.

Business: LLC, taxed as an S-Corp, 2 partners, will need approx 50k to 100k for startup

Scenario:

Partner A will fund 50k and does not plan on joining the business for more than 5% of the time until 6 to 18 months later, once the business is established and getting revenue. Partner A will not draw a salary until she is full time with the business.

Partner B will fund 50k and join the business immediately (full time), while drawing a salary from the business account.

Questions:

Should there be a bonus/additional percentage for Partner B once the company is profitable? Partner B is basically doing all the heavy lifting initially, takes a greater risk by quitting her long term job, and brings 10 years experience in order to get this up and going. If so, what is fair or the normal standard and for how long?

Is there any benefit to Partner B if the percentage of ownership starts off at...let's say, 65/35 (B/A) until Partner A joins the company full time? And then at that time, the percentage changes to 50/50? I see, in theory, why that would give incentive to Partner A to hurry up and join--but wouldn't that only work once we're profitable? If Partner A ends up coming on at 9 months in, and we're not profitable yet--then what would be the benefit to a split in Partner B's favor?

[Business Attorney]

There is no right answer. Certainly Partner B is contributing more effort and taking more risk initially. If the salary she is being paid during the start up period is not sufficient to compensate her for the risk, then it seems thualat some extra payment is appropriate. My own view is that if the overall spirit of the venture is equal partners after the start up period, i would not try to tinker with the split. I would make it some specific limited payment. For example, if the right number is $10,000, then decide that after Partner A comes on board 10% of the net income goes toward paying down the $10K until is paid off and the balance is distributed to the partners in equal amounts.

As you have pointed out, a temporary shift in percentages until Partner A comes on board may be meaningless if the company doesn't reach profitability during the period.

The bigger thing I would warn you about it making sure that you cover the contingency that Partner A might delay coming on board or, possibly, never quit her day job at all. I have seen that happen several times with people who never planned for it. Let me tell you, when it happens without planning, it is a big mess. Deal with it now even if you think it will never happen to you.

[Rogen]

Thank you, David! You make a great point about putting something in the agreement about Partner A joining full time. So something to the effect of: If Partner A has not quit her job and come to Company, LLC at a full time status in XX months, then Partner B has the option to....buy her out? Dissolve the partnership? Extend the time period? Are there other options out there I'm not thinking of?

You say the magic number is 10k--ok, so you're saying instead of giving Partner B a percentage for her extra efforts, a set amount might be better? I can see that it would be, especially since we're not sure when things will become profitable. Ok, so then if the agreed upon amount is 10k, then the agreement can say something like, Partner B will receive 10% of the net income each month until 10k has been paid in full...?

You also said after Partner A comes on board....so what happens before then? Let's say, for whatever reason, Partner A still hasn't come on board--and it's 12 months in. The universe loves us and we are bringing in revenue, paid back whatever we have put in and are now becoming profitable. Should the profit still be 50/50 split if A isn't full time yet? Or maybe we should put in the agreement--if profitable, and Partner A has not joined, the split of profits will be 65/35 until A joins....?

Sorry for all the followup questions. Thanks for your help....you have no idea!