Best Practices for Splitting Profits in a Small Business Partnership

Best Practices for Splitting Profits in a Small Business Partnership

 

Determining partnership profits in a business can be a huge source of strain, if not handled properly from the start. Before starting your business with one or more partners, make sure that you all agree on the structure of your business first. This can have a big impact of partnership profits as can the time and individual resources each partner contributes to the business.

Business Partnership Structuring Options

A general partnership is the simplest business structure. Unless the partners request differently, this type of partnership assumes a 50-50 split of management duties, liabilities, and profits. If one person plans on contributing more time or financial resources than another, this should go into the documentation right away. The only other necessary step for a general partnership agreement is to register for a Doing Business As (DBA) name.

A limited liability corporation (LLC) is a second option to consider. If you and your partners plan to provide a professional service such as homebuilding or accounting, the LLC structure protects your personal assets if a client files a lawsuit against you. It also protects all partners from personal liability for business debts if the business fails. A limited partnership exists when one of the partners financially invests in the company but doesn’t help manage it in any way.

Be Sure to Put Everything in Writing

It’s inevitable that disagreements will arise about a wide range of issues. Deciding how to resolve these issues in advance can make things much easier down the road. We recommend that you include the following at a minimum:

Documentation of property, equipment, cash, or other personal assets that a partner donated to the business.

Delegation of tasks such as hiring, payroll, marketing, and other major duties.

Percentage of profit each partner will receive, percentage of loss he or she must take if the business loses money, and when he or she will receive payment for partnership profits.

How to handle decisions for the business, disputes, and the potential future dissolution of the business. This is also a good time to determine how much decision-making authority each partner should have.

Decide How to Split Partnership Profits

There’s no right or wrong way to split partnership profits, only what works for your business. You can decide to pay each partner a base salary and then split any remaining profits equally, or assign a percentage based on the time and resources each person contributes to the company. Keep in mind that a 50-50 partnership legally requires one partner to receive the approval of the other.

Once everyone agrees on how to split partnership profits, it’s time to make it legal by putting it in writing as described above. It’s also a good idea for all partners to meet with an accountant to ensure they understand the tax ramifications of each of their decisions. Lastly, don’t forget to revisit the written agreement annually to ensure everyone is still on board with the plan.

Do you need help with structuring your business, determining how to pay profits, or another issue? Contact our small business consulting company today to request a meeting.