Need some help on profit sharing of partnership


1

I'm starting a small online apparel business with a good friend. But I'm having trouble finalizing the partnership agreement. It is a little complicated for me now because we are both investors and involved in the operations.
Let's say the scenario goes like:

Capital: I put in 70% of the capital while she puts in 30%.

Job scope: I'm responsible for the overall operations from sourcing, importing, production of the product images to getting online, posting out and tracking of all expenses, sales etc. Basically I would say I'm working as the shopowner.

Her scope would mainly be involving in the product selections and modelling for each collection, which for a start could be a once in 2-3months occurrence. Only if the shop takes off, the frequency of the shoots might increase. She will also suggest on some marketing but execution should still involves 2 of us.

My question is how should I structure the profit sharing ratio? We are both not drawing salary for our scope of work because we are starting up. Initially, the suggested ratio is still a 7:3 ratio based on our investment ratio. But after thinking through, I thought it is a little strange that I'm the "major" investor and I'm also the sole operating person to maintain a 7:3 profit ratio? Does it make more sense that perhaps the ratio is adjusted to 8:2 , meaning I will get 10% more for the additional efforts? Could somebody enlighten me on this? I'm so confused on how should I come up with a fair ratio to both of us. It's a little tricky with good friend... I don't want the trust to be affected.

On a side note, I have no problem putting in 100% for the capital. It's more on the job scope that I wish to recruit 1 more partner.

Partnerships Profit Sharing

asked Jun 20 '12 at 00:57
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Lkk
8 points

1 Answer


0

If it is mainly on job scope, then you shoudn't complicate your life (if not necessary) with splitting ownership, especialy not with close friend. Talk to her and find out what would motivate her; she might be totaly ok with status of your employee with fixed/varialbe salary.

However, if you want to stick to divided ownership, then capital to labor ratio is very important. So for example, if your venture requires minimal capital investment, then you should split profit based mainly on amount of work. On the other hand, if your business needed 100 milion € investment, then the fact that someone works 2 hours a day, while other partner works 10 hours a day wouldn't significantly affect profit sharing scheme.

One last thing: before you make any sort of investment, you should together evaluate roles in company to the details. If you fail to do this, it might be all over right after the first € comes to the cashier.

answered Jun 20 '12 at 08:01
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Matej Zlodej
273 points
  • Thanks much for your suggestion. Yes, I did discussed with my partner and drew the roles and scope. Because it's small business, I would think profit sharing based on labour is more suitable for now. I would see the labour ratio is about 8:2 or 7:3. So the part that I'm not sure is if we still go on split ownership 7:3(me:partner) , do we go on profit sharing 7:3? Or do I need to increase the profit sharing ratio to justify my bigger efforts and investment ratio? And of course, to be fair to my partner for investing too – Lkk 7 years ago
  • Try to translate estimated work hours to € (don't forget that different tasks pay differently) and then add amounts of capital investment. Then you should get profit sharing ratio. So yes, you should be rewarded completing more than 70% of tasks. – Matej Zlodej 7 years ago

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Partnerships Profit Sharing