# Business Partnership Profit Sharing



## davidjean (Mar 27, 2014)

Hello forum readers. I'm 1 of 4 partners in an equal share partnership. 25% each.

We are all responsible for any liabilities or debts equally.

It's been a fantastic year for us in business (1st year in business) and we have no debts.
In fact there's around $40,000 in profit to be shared. This profit is after we've all been paid for our hourly contributions.

Here's the question. How should we share the profit? 25% each ? 

But, I spent more hours (which I've been paid for) and I'm responsible for 50% of the sales and 50% of the profits.

It's a difficult question because I spent much more time. 

Also, consider this. 1 of the 4 partners worked very little. 
He didn't get paid much for his hourly contributions. 
But, is he entitled to a 25% share in the profits?


----------



## donald (Apr 18, 2011)

I own a business(with my father)
Imo-we deplete.
Don't you guys want to retain and build capital in the company?
esp after only 1 yr
rather than tax it out and worse maybe even have to personally fund.
Having a build up of cash in a business is 101 even more Important than a build of cash on a personal level.


----------



## LBCfan (Jan 13, 2011)

You've been paid for your time. If your time added more value, negotiate it's value next year.

Profits reward the suppliers of your capital. 25% = 25%


----------



## couchman (Oct 10, 2013)

I agree with LBCfan If you had lost a 100k I am sure you would not want to put in 50% instead of the agreed upon 25%.


----------



## Eder (Feb 16, 2011)

Also you might approach the partner who worked little & suggest the other 3 partners buy part or all his shares.

Talk to an accountant to set up the partners as 1st payable before banks/bonding companies/lawsuits as well. Money well spent. 

We used to only leave enough in the business each year to take advantage of Alberta's small business tax credits...the remainder we would dividend out to shareholders...


----------



## Russ (Mar 15, 2010)

My understanding is that the profits of a partnership must be attributed to the partners according to their partnership agreement. If they don't have an agreement, then equal shares must be allocated according to the Partnership Act. (I haven't actually checked to see if the Partnership Act has been updated). So the OP should inquire as to what the partnership agreement says. If there is no partnership agreement, maybe they should get to work on that. In the absence of a partnership agreement the Partnership Act supplies a bare-bones agreement - but it may not be what the partners really want.

In any event, I don't think allocating the profits to the partners' capital accounts means the cash must - or even could - be withdrawn from the business. It is quite possible that there would not be sufficient cash in the bank to pay the partners their share at the moment.

If Eder would be willing to share, I'm interested in how partners can rank ahead of secured creditors.


----------



## Eder (Feb 16, 2011)

Actually we were subordinate only to our bonding company. I am no accountant so would not know how we did our setup other than acting on the advice of our accounting firm to get them to do it years ago. 

We would dividend most funds out to the partners then lend the money back to the business for bonding. I think we left ~300k/year in the company as the effective tax rate for small business up to that amount was small.

I think this setup is pretty typical in our line of business (small construction/engineering) and protected us from lawsuits/creditors ...pretty much everything other than the bonding company. I think any CPA here could elaborate.


----------



## davidjean (Mar 27, 2014)

Yes, well maybe its time to break off the partnership and go it on my own.

There is something inherently wrong with doing the majority of the work and not getting compensated.


----------



## Just a Guy (Mar 27, 2012)

You are getting compensated, you took more money out of the company than your partner did, only you took it out as a wage.

If you owned a company outright, and had employees, should they get all the profits? They do all the work, you're only the owner. I'm sure you'll find "doing it on your own" is more difficult than you think.

Of course, I'm not a big fan of partnerships to begin with, I've had a couple, and known many...the majority always seem to have someone who feels "taken advantage of". Sometimes it's true, but often people don't understand what others bring to the company, or what's involved in running a company. 

It's why so many employees feel they can do it themselves as well...only to learn that running your own company isn't all that easy. Prime reason many companies fail.


----------



## OptsyEagle (Nov 29, 2009)

davidjean said:


> Yes, well maybe its time to break off the partnership and go it on my own.
> 
> There is something inherently wrong with doing the majority of the work and not getting compensated.


In case anyone wonders why it is difficult to make partnerships work. This is probably more the norm, then the exception.


----------



## donald (Apr 18, 2011)

You just said all four of you had a fantastic year(this is usually not very common in infancy of a business)
You have all been paid/compensated for your duties/roles in the daily operations of the business

This is all about equity on profits over and above

Make sure you weigh this decision!
BAD advice to take your tent down and leave!
Don't let greed and division of labour cloud the fact that obviously this current business has something by your own admission(without focusing on relationships aspects)
This is workable and if your just in what your saying I am sure as a group you all can find a solution.

I take the other view!
this is how greed ruins a business
You haven't really been shafted at all imo
Don't burn the whole thing done yet!(You all knew full well going in business ownership is a challenge and personal issues will Always be present)
I have seen in my own family a business break down and eventually sold because of these same issues
and everybody 2 years later were weaker because of it
Think hard if you are multiple times better off from a bottom line perspective than before your this business
And think hard if your certain a yr from now you will be better of.
This is a solvable issue-don't focus on the trees focus on the forest
my 2 cents-


----------



## Eclectic12 (Oct 20, 2010)

davidjean said:


> ... There is something inherently wrong with doing the majority of the work and not getting compensated.


The OP said that an hourly compensation *was* paid.

Question is ... what did the partners agree to?
If the OP agreed to a split of the profits, after whatever the hourly compensation is paid out ... then expecting a change in the agreement sounds like a breach of the agreement.

Certainly going back and highlighting how valuable one is (or moving on to being on one's own) is fine but where it was agreed that the setup was hourly compensation with a four way split of the profits ... that's what was agreed to.


Cheers


----------



## Eclectic12 (Oct 20, 2010)

OptsyEagle said:


> In case anyone wonders why it is difficult to make partnerships work. This is probably more the norm, then the exception.


Yes ... though it's not as bad as what happened to my sister-in-law.

A month into buying the business/setting up shop, the partner decided the business was not to her liking and quit.


Cheers


----------



## Just a Guy (Mar 27, 2012)

The better solution would be to renegotiate his hourly wage or compensation (perhaps getting a commission).


----------



## Numbersman61 (Jan 26, 2015)

The reality is that there is one partner who is contributing little to the business. It's time for a frank discussion among the partners on how to make things work in the future. If the partner is not prepared to pull his weight, the decision has to be made as to whether he should remain a partner. Don't try to change profit participation for past year but deal with the future participation arrangements now. My feeling is that this individual should likely be severed from the firm.


----------



## OptsyEagle (Nov 29, 2009)

Remember. Salary and bonus distribution should be based on individual performance. Profit distribution should be based solely on ownership.


----------



## Russ (Mar 15, 2010)

Can someone clarify the compensation issue? This is a partnership, and I have always thought partners could not be paid salary, commissions or wages. It sounds to me like the partners in this case are getting an allocation of profits based on their contribution of time or effort, then any remaining profit is allocated equally. So they are not sharing profits equally. Their allocation of profits differs due to their contribution.

It would be interesting to know if the partners contributed equal amounts of capital to fund the business. It makes sense to me that profits should be allocated partially on the basis of effort and partially on the basis of investment. It seems like this is what is going on here. Presumably if one or more partners are unhappy about the agreement they could lobby the other partners for a change in the agreement.


----------



## Numbersman61 (Jan 26, 2015)

Russ said:


> Can someone clarify the compensation issue? This is a partnership, and I have always thought partners could not be paid salary, commissions or wages. It sounds to me like the partners in this case are getting an allocation of profits based on their contribution of time or effort, then any remaining profit is allocated equally. So they are not sharing profits equally. Their allocation of profits differs due to their contribution.
> 
> It would be interesting to know if the partners contributed equal amounts of capital to fund the business. It makes sense to me that profits should be allocated partially on the basis of effort and partially on the basis of investment. It seems like this is what is going on here. Presumably if one or more partners are unhappy about the agreement they could lobby the other partners for a change in the agreement.


I was in a professional partnership for many years. We allocated profits as follows: base salary 60% of estimated profits (different salary for each partner), then at end of year 20% bonus allocated to individual partners based on contribution to profits and balance based on equity interest of each partner.


----------



## Russ (Mar 15, 2010)

Numbersman61 said:


> We allocated profits as follows: base salary 60% of estimated profits (different salary for each partner), then at end of year 20% bonus allocated to individual partners based on contribution to profits and balance based on equity interest of each partner.


Thanks, that helps to clarify. The portion that was "base salary" was really an allocation of profits, not a salary in the sense of a payment to an employee with the required statutory deductions.


----------



## Eder (Feb 16, 2011)

Bleh...I had been assuming op was partners in a corporation. I think there is very little reason not to incorporate.


----------

