How to split profits between busines partners

[cookie123]

Hi everyone, new on here...I am about to go into business with a friend, we have yet to draw up an agreement. But what I want to know is, if I am working full time in the business and doing most of the work including accounts, and my partner is only part time but we have put 50/ 50 capital in - how do we split the profits. My business partner also has about 40 days holiday a year. Do we put on the agreement that ie employment law states 28 days a year is the minimum statutory holiday for staff (even though they own half the business). But 40 days a year out of a business is extreme, so should I state that I do not want her to have 40 days a year but if she goes over the 28 days she does not get paid? Which can happen in any other company.

Just a few questions I need answering before I actually do decide to start this business with them. Last thing I want is working all the hours and then them reaping in the benefits without actually doing anything significant.

 

[sanjiv]

Maybe splitting it by ratio of hours worked ?

EDIT: After more thought, I agree with EBA Advisor below.

If you are thinking like this now, my advice would be not to go into business with this person. It will not work.

 

[Aspect Investments]

If you are thinking like this now, my advice would be not to go into business with this person. It will not work.

 

[cookie123]

I think its questions that need to be asked and answered.

 

[Aspect Investments]

I think its questions that need to be asked and answered.

You already have an unbalanced partnership, which you are concerned could lead to you doing all the work and your partner still has a 50% stake.

This unbalance is a major concern for you at this early stage, and is going to get worse and lead to resentment, so at some point the partnership is going to break down.

So you need to either get a partner that is going to put in 50 50 in all aspects of the business, or go it alone.

 

[TotallySport]

If you both own 50% of the business then you are both entitled to 50% of the profits, the only options would be to allocate salaries accordingly to conpensate the different amounts of work.

 

[jim_gold]

Look, most partnerships are unbalanced.. if not at the start, down the line. Very seldom are you going to get an even split in hours worked, the only problem is that people don't recognise this at the outset.

This person may well be bringing in some qualities that complement yours, maybe experience, contacts, skills etc. So why not go into business with them?

It's great you are looking at the situation now, rather than let it fester later and ruin your business and personal relationship.

Capital and dividends (i.e. split of profits) is one thing. Payment of salary/wages for time worked is another. It can be fair that you both get 50% for putting up 50% of the capital each. But you are well advised to treat hours worked as a separate expense, paid on a per-hours-worked basis, to be deducted before the end-of-year profits are calculated.

Key is to get an agreement on this up front. If you can't agree on this, then perhaps the partnership won't work. But keep it positive.

 

[Jonpolygon]

I am not convinced that 50/50 partnerships work, especially with friends and especially if the workload is not balanced, but I do agree with others here and respect that you are looking into sooner rather than later.

Also I am a bit concerned that you are talking so soon about profits. Ideally you will want to scale a business, which often means pumping those profits back in and putting them to good use in marketing or development, you may even want to keep a level of profit available as a contingency. There could be squabbles over this down the line so ensure you have down on paper what you plan to do with profits other than distributing them to partners.

In any case, I presume you are talking about either issuing dividends or a bonus based on profits. This could be issued in a number of ways, I personally like ratchet style systems, rewarding those based on the achievement of certain goals. You ideally want to promote achievement in the company, this can be a great motivator.

My business partner also has about 40 days holiday a year. Do we put on the agreement that ie employment law states 28 days a year is the minimum statutory holiday for staff (even though they own half the business)

Squabbling over holidays is not a great idea. She may be accustomed to 40 days, in which case that is fine, but reward yourself accordingly and put yourself and the business first. I can understand that you don't want her to take too many days off, is this not raising a few red flags in your head right now?

I would never advise trying to change anyone's habits, it is like trying to get someone to work weekends when they have never worked a weekend in their life, it just wont work and end in tears.

However well you think you know yourself or your business partner try to put that aside, think of the worst situations that could happen and have rules and agreements in place to come to quick decisions. Some people may also be passionate in the beginning but this passion may begin to break down.

Profit is certainly the tip of the iceberg in this case.

 

[UK Solicitors]

I hate to also be the sound of "caution" but...

If you have a really sound business idea (and you should go away and tot up the real pros and true cons and have a very hard think) then if you stlll want to go ahead for god's sake make sure you get your PA drafted and signed.

If you go ahead without this document the writing is already on the wall - and I can tell you from sad experience that the business - and the friendship - is very very unlikely to survive...

 

[oldeagleeye]

There is an extremely simple solution to all this.

You are both putting in the same capital so 50-50 is fine providing you have a proper shareholders agreement and that is the point. You are both shareholders and should you wish share the profits 50-50.

You however OP will be working full time for the company and so you get an additional salary to pay for the hours worked. It doesn't really matter at this stage how you record this such as min tax free allownce and dividends but lets say for instance it is min wage £6 quid an hour.

Now if you work 40 hrs a week fine. That is £240. On the occassions your partner can work he too gets £6 quid an hour. Take that forward and over a year you have earned roughly £12,000. Your partner if he works 100 hrs gets £600. Thus wage bill of £12600 comes off before profits which you then split 50-50. Simple

BTW. I may be wrong but as I understand it there is no statutory holiday allownce for Directors

 

[Aspect Investments]

You all seem to be missing the point here. Lets look at it from a more one sided view. Say you go into business with someone 50 50 set up costs and 50 50 profit split. You are running the business and doing all the work. The other person does not do anything. You get paid a salary for this, but the profits are split 50 50.

Say in 10 years time the company is worth 10 millon. You own 50% of the business so your share is woth 5 million, but you have taken the business from nothing to 10 million. Its all your work, your partner has not done anything. How is that fair?

If you are going to go down this route you will need to divide the company up at the start, as well as pay wages for hours worked. If your partner is only going to be putting in 25% of the work, then they should be entitled to 25% of the business and the profits.

 

[TotallySport]

You all seem to be missing the point here. Lets look at it from a more one sided view. Say you go into business with someone 50 50 set up costs and 50 50 profit split. You are running the business and doing all the work. The other person does not do anything. You get paid a salary for this, but the profits are split 50 50.

Say in 10 years time the company is worth 10 millon. You own 50% of the business so your share is woth 5 million, but you have taken the business from nothing to 10 million. Its all your work, your partner has not done anything. How is that fair?

If you are going to go down this route you will need to divide the company up at the start, as well as pay wages for hours worked. If your partner is only going to be putting in 25% of the work, then they should be entitled to 25% of the business and the profits.

I disagree, but can understand possible problems.

So if I setup a business and then employ a manager to run it and build it, they build it upto be worth 10 million, yet still the manager doesn't own any of it, is that fair?

There maybe reasons for the partnership, if the first person doesn't have the money to setup the company and they both put in 50% of the money, then I don't see a problem with the 50% split, the person working can take a salary of 1 million a year where as the other person could take 10K if anything, which will even the money work balance out.

Better to have 50% of something than 100% of nothing. You can get to hung up on money, you could always buy them out after say 2 years and own 100%, but this should be discussed and agree in writing before setup.

The one issue is the 50/50 split might cause issues in desicion making within the company as you will both have to agree on everything for it to happen. I would want a 51/49 if I was doing the work.

 

[Aspect Investments]

So if I setup a business and then employ a manager to run it and build it, they build it upto be worth 10 million, yet still the manager doesn't own any of it, is that fair?

The manager has a choice on whether he works for you or not. If he does not think hes getting a fair deal he can walk.

When you own half of a business and you are unhappy you cant just walk out and go and get another job.

And I doubt the other partner would agree to you taking a million pound a year in wages either.

If you are intent on going into business with this person, split the company up at the start. If they are putting in 10% of the work, they are entitled to 10% of the business. You can always give them more, if they put in more work, or decide to come into the business full time.

Look at it this way, if you borrow 50% of the set up costs from the bank, they are not entitled to 50% of your profits.

 

[TotallySport]

The manager has a choice on whether he works for you or not. If he does not think hes getting a fair deal he can walk.

When you own half of a business and you are unhappy you cant just walk out and go and get another job.

And I doubt the other partner would agree to you taking a million pound a year in wages either.

If you are intent on going into business with this person, split the company up at the start. If they are putting in 10% of the work, they are entitled to 10% of the business. You can always give them more, if they put in more work, or decide to come into the business full time.

Look at it this way, if you borrow 50% of the set up costs from the bank, they are not entitled to 50% of your profits.

My wage example was extreme but was supposed to point out that it could easily compensate for difference in working hours and work put in.

But you don't setup a business based on working hours, you setup a business based on the amount of capital or risk your putting in, if someone puts up 50% of the risk why should they accept less in shares?

The work put in, is down to wages and not shares, the salary should reflect the work put in and what they bring to the business and can be as much or as little as you want, making it very easy to balance the financial gain.

 

[Aspect Investments]

My wage example was extreme but was supposed to point out that it could easily compensate for difference in working hours and work put in.

But you don't setup a business based on working hours, you setup a business based on the amount of capital or risk your putting in, if someone puts up 50% of the risk why should they accept less in shares?

The work put in, is down to wages and not shares, the salary should reflect the work put in and what they bring to the business and can be as much or as little as you want, making it very easy to balance the financial gain.

Lets agree to dissagree. I think i have made my opinions clear enough, plus the op seems to have done a runner.

 

[TotallySport]

Lets agree to dissagree. I think i have made my opinions clear enough, plus the op seems to have done a runner.

I agree.....

 

[jim_gold]

EBA - that is not the way businesses are created. Period. We have millions of pounds of business transactions instigated through the Business Sale Report each month and I am telling you the way that it is.

TotallySport is correct.

You need to understand the difference between a loan and capital. And the difference between a shareholder and a wage-earner.

 

[JElder]

It's the difference between company ownership and employment - the two are often intermixed.

Company ownership and shareholding is generally to do with either capital put in or equivalent value some other way. Capital is easy, equivalent value is harder - you put in £50,000, I put in only my industry contacts - should that be 50%?

One way to do it is to try to place a figure on the equivalent value - so if those contacts are worth £50K, you get 50% shares. If they are only worth £10K, then you get 16.67% shares (£10k/£60K).

Separately, there is a salary. Hopefully, the company can afford to pay a reasonable salary and bonus scheme. The salaries and bonuses should be competitive in the marketplace for the work done and terms. So someone that works short hours, and has lots of holiday will get less than someone with longer hours. A person with expensive skills, such as a skilled programmer or qualified accountant will get more than someone who has lower valued skills.

Finally, the salaries need reviewed as circumstances change, and it is common to forgo some salary (especially at the start) in return for shares - i.e. I will work for £10K less than market value, but expect £10K worth of shares extra to be given to me every year.

Of course, placing figures on all these items, especially share value, is really hard.

 

[Aspect Investments]

EBA - that is not the way businesses are created. Period. We have millions of pounds of business transactions instigated through the Business Sale Report each month and I am telling you the way that it is.

TotallySport is correct.

You need to understand the difference between a loan and capital. And the difference between a shareholder and a wage-earner.

I dont need a lesson in business from you Jim, but thanks for your comments.

 

[cookie123]

This was my initial thinking if they put 25% in then they should only get 25% of the profits... by the way this is a business that we are buying together that is already established.

You all seem to be missing the point here. Lets look at it from a more one sided view. Say you go into business with someone 50 50 set up costs and 50 50 profit split. You are running the business and doing all the work. The other person does not do anything. You get paid a salary for this, but the profits are split 50 50.

Say in 10 years time the company is worth 10 millon. You own 50% of the business so your share is woth 5 million, but you have taken the business from nothing to 10 million. Its all your work, your partner has not done anything. How is that fair?

If you are going to go down this route you will need to divide the company up at the start, as well as pay wages for hours worked. If your partner is only going to be putting in 25% of the work, then they should be entitled to 25% of the business and the profits.

 

[cookie123]

Hi everyone, thank you very much for your comments. Reading through them all I have learned alot.

Maybe I should have pointed out that the business is an established one. But anyway, I received an email this morning from my "partner" and they said the business doesnt warrant 2 owners.. which I had said straight from the start. Anyway, I was going to buy it for me, but my friend was the one who suggested a partnership. To cut a long story short they are now deciding to buying it on their own and it seems our partnership was the shortest in history!!

Strangely though I have felt as though a weight has been lifted from my shoulders. Thank you everyone!