Start up capital/profit distribution

[TRIPART]

Hi
Just some advice on a start up, there are 3 partners to the business and we are considering putting some capital into the business in equal amounts. two of the partners (the money makers), the third person (the overhead) will work less hours per week. All will get paid according to the number of hours they have worked - well thats the plan!
one of the partners has suggested that the third person who doesnt earn the money as such and will work less hours but put in the same amount of capital should take less of a share of the profit. but surely if each person gets paid according to the hours they work and they all put in the same capital to start everything off they should have equal distribution of profit?

please tell me what you think
thanks

 

[Billmccallum]

equal shares = EQUAL

Less work = less wage

 

[Anna Chandley]

Is this a limited company or a partnership?

 

[TRIPART]

We're going to start as a partnership.

 

[melissajoe]

You can share every thing equally. Make sure to get all the papers ready so that there will be no further conflicts. You can divide work in sections too.

 

[Philip Hoyle]

You need to start thinking in terms of separating the "wage" from the "profit".

Ideally, the three of you should receive a "wage equivalent" according to the number of hours worked and skills/qualifications/experience of each person.

Then, after you've accounted for that, any "profit" left over should be split according to capital/money invested.

I'm not saying you should be paid a "wage" as such via payroll as dividends etc will be cheaper in terms of NIC, but you need to devise a way of paying wages/dividends/benefits in kind in that kind of proportion to reflect time worked, alongside skills, alongside capital injected. The usual way to do this is with different classes of shares so that dividends can be paid to the three of you in different amounts to achieve this. (as well as the usual basic wage through payroll at the NIC limit).

 

[Peter Garry]

I agree with melissajoe that you should document your agreement, in other words have a signed partnership agreement which sets out all of the terms, including what happens if one of you wants to leave the partnership (or dies).

Most of the disputes that come my way arise principally because there was no partnership agreement in place before the business started trading.

It doesn't matter too much whether you call the income generated wages or profit (but "profit" is the term usually used). The main thing to understand about a partnership (in contrast to a limited company) is that whatever the profit is in a given year, the partners will together be taxed on all of it personally, whether or not it is distributed to them out of the partnership bank account.

Peter

www.plawb.com