If you’re considering going into business as a partnership, then you’ll have to be prepared to divided the gains. But what’s the best basis for doing so, especially if one partner contributes more work hours or invests more money in to the business? Here’s what you ought to know to plan your profit-sharing strategy in a little business partnership, and several other actions you can take to make that partnership airtight.
Before you make any decisions about splitting earnings, talk to a lawyer about the best way to legally structure your business. There are many options to consider. Two of the are general partnerships and limited liability partnerships. Let’s look at both. The simplest route is to create a “general partnership”, simply register your “doing business as (DBA)” name and open up a bank account in the business’ name. This structure assumes that profits, liability, and management duties are equally divided among the companions. If the partnership is unequal, like a 30-70 ratio, then you’d need to document the percentages assigned to each partner in the partnership agreement (more on that later).
Another option is a “limited responsibility partnership” also called an LLP. Professional partners, such as accountants or lawyers, are often recommended to visit this route since it protects the business owners from personal liability for the bills or liabilities incurred by the partnership. For instance, if you run into a cash flow issue and your business fails, neither partner will be liable for any money owed to creditors individually. Another option is a “limited partnership (LP)” where one partner invests in the business but doesn’t manage it, leaving that task to 1 or more of the other partners. Research these options to understand which makes more sense for you.
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You may want to ask your financial consultant or lawyer for advice concerning this. In a business partnership, you can split the gains any real way you want-if everyone is in agreement. You could equally split the gains, or each partner could receive a different base salary and then split any remaining profits.
This will depend on you as well as your partners to choose. Remember, within an equal collaboration (50-50) neither partner can make a decision without the other’s acceptance, whereas in a 51-49 percentage, for example, one partner has last authority. If you know in advance that a number of partner is only going to play a minor role in income producing activities, you might agree to pay the more vigorous partner an increased salary. Another variation is to pay partners only for work performed based on pre-determined rates for several projects.
Whatever you decide, it’s smart to develop a profit-sharing agreement and make it part of your larger partnership contract. All companions should concur and sign, to avoid problems later. A collaboration agreement is the business version of the prenuptial agreement and really should be completed before you start procedures and any earnings are created (the division of income is a critical part of this process).
Although an contract is not lawfully required, it can protect your interests as one fifty percent of the partnership for the duration of your relationship and through its dissolution. Division of earnings – This consists of both the division of earnings and losses and how so when each partner will get paid.
Contributions to the relationship – If either partner contributes any possessions to the business, whether it’s cash, property, or equipment, you’ll need to ensure these are documented. Business decision-making – What specialist does each partner have to make business decisions? How will you handle disputes? How will you handle the dissolution of the relationship when that right time comes? Who does what – Divide up your management duties and document them in the agreement.