How To Split Business Income Between PartnersArticle written by Theresa
One of the hardest things for new business owners to figure out when forming a new corporation or partnership is how to split profits.
Often times 2 or more entrepreneurs will enter a business venture with the notion of sharing profits 50/50. But what happens when one person does 90% of the work while the other only contributes 10%?
Is this still a fair split?
To complicate things even further, what if your business partner was a family member or close friend? If you're the one doing 90% of the work but only receiving 50% of the profits, how do you go about approaching your partner with a request that you take home more of the profits?
Here's one possible solution.
Do You Have The Right Business Structure?
This is where so many people who try to save a dollar and incorporate themselves without really understanding the different business structures can do more harm than the pros of saving a few bucks.
I understand when you're starting a new business you're probably building it on a skeleton budget, but there are a few places you should not skim on, one of those being structuring your business.
Understand this: If you set up the wrong business structure you could severely limit your business' growth potential, profit distribution flexibility, asset protection, and tax incentives - among others. This is why it is so critical to get incorporated if you're thinking of setting up a business.
As a quick example, we could take a look at one major difference between a S-Corporation and LLC.
In a S-Corp, tax liability and profits are set 50/50 for partners (or equal percent if there are more than 2 owners) whereas in a LLC partners can easily reallocate these.
So your first step is to make sure you have the right business structure in place for the dynamics of your business.
Create Positions In Your Company
The next thing you can do is sit down and figure out all the different functions in your business. Here are a few ideas to get you started:
Do this for every function in your business. If both you and your partner share some of those responsibilities, try to figure how much each contributes percentage-wise. If you're not sure (and you're in no particular rush), set this list aside and jot down how much time each of you contribute to each department over the course of a month or two.
Assign Wages For Each Position
Now that you have a nice outline of the different positions in your company you can then assign wages to each of those departments. If your business' income fluctuates, it's often times easier to divvy up income for each department as a percent.
At this point, you should now be able to approach your partner with a logical outline of how your business is really being run and evidence to support why you deserve more of the profits than 50%.
Have you ever experienced a situation where you felt you were due more $$$ in your company because you did the majority of the work? How did you deal with it? Or did you just let it be?
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