Developing a Profit-Sharing Strategy for Your Business Partnership
When entrepreneurs enter into a business relationship as partners, one of the planning necessities which should be addressed is how to handle profit-sharing. This may be a difficult issue, especially if one or the other is a bigger contributor to company success, so here are some guidelines on how to go about establishing a profit-sharing strategy.
Which business structure to adopt
There are a couple options when considering a legal business structure. An assumed partnership is created when you setup in a ‘Doing Business As (company name)’ arrangement, and that automatically calls for equal sharing of profits among all partners. Any other sharing percentage would have to be explicitly specified. A limited liability partnership protects all partners’ personal assets should litigation be initiated against the business itself. Another possibility is to create a limited partnership, wherein there may be investing partners who are not involved with managing or running the business.
How profits can be shared
Any profit-sharing strategy whatsoever can be adopted, as long as all parties agree to it, and legally commit to it in writing. The important thing to know at the outset is that in a 50-50 partnership, all decisions must be agreed upon by the two partners, whereas in any other arrangement, the partner with the greater percentage has final authority over all business decisions. Whatever is decided about profit-sharing should be incorporated into the broader context of the overall partnership arrangement.
Make sure it’s all in writing
A written profit-sharing strategy is not a legal business requirement, but if you don’t have one in place, you’ll almost certainly run into all kinds of heartburn at some point in the business relationship. The written agreement which both parties are subject to should include all of the following: a formal division of duties, an understanding of how business decisions will be made, individual contributions to the business, division of profits between partners, and even an exit strategy for both partners, should that become necessary.
For more help getting your new business off to a strong start, contact Trihawk Capital at 732-784-1808 today.
