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April 06, 2018

Is it Possible to Split Profit in a Partnership with Ease?

By Special Guest
Bernadine Racoma, senior content writer at Day Translations

There are a lot of benefits in choosing to start a business via partnership. You are entering a business with exciting ideas and you get to share them with someone who has the same level of excitement as you. Perhaps, you have started this whole idea together and it has rolled into this great business that you are about to commence.

You also know that when this business has started, you have someone to share the workload with. When things get tough, you know that you will not be alone. You will have someone by your side helping you get through whatever problem it is that may come along the way. This person will also be there to bring your focus back especially when you are no longer interested in the business.

Deciding to start a business via partnership is easy. The difficult part is deciding how to split the profits. It becomes more confusing as you decide if you divide based on workload or amount of money invested as capital.

Have a formal business structure

It is a must to have a business structure in place. Ask for legal advice on how to create a clear business structure. One good way to deal with this is to have a clear arrangement on how the business will be carried out. For instance, even if you are in a partnership, you can decide to look after your own income taxes. In terms of debts and liabilities, this is usually shared. You need to have an agreement right from the start on how to deal with these issues. Other details should also be discussed right from the start so everything is clear. The document created in the end that both parties have signed will be legally binding.

Create a partnership agreement document

Everything has to be put into writing with a partnership agreement form. This should be completed even before the business begins. It helps protect both of your interests and properties that were acquired before the partnership started. This document also requires both parties to hold up their end of the deal and have consequences in place for those who don’t. Asking a lawyer to help you sort this document out would be great. Don’t forget to include these details during the discussion:

  • People who are allowed to be shareholders
  • Conditions when one of the shareholders dies or is unable to continue doing the job
  • Amount for every share of stock
  • Authorized individuals who can purchase the shares of a shareholder or partner who decides to leave
  • Penalties for not following the terms agreed upon   

Determine how to split the profits

This is the most complicated aspect of the job. Both parties should agree on the division right from the start to avoid confusion. The easiest way is a 50-50 split. You divide the profits right down the middle. This is the ideal division provided that everyone does exactly the same job or puts the same level of effort into the business. If one person works more than the other or has provided more capital than the other, it can be a problem. If one of the partners pays all the bills while the other has not contributed more than the initial amount, it can also be a big problem. 

If you are determined to push for this option, you need to have an additional clause on what other agreements you will enforce as partners. It can be very messy if the details are not clarified from the beginning.

Another strategy is called pro-rata. This is where you determine the profits based on what you do compared with what your partner does. This works well if you can record everything that you have done. It also works if you can track your performance based on certain standards or perhaps the amount of money you have brought to the company. In doing so, the partner gets what he or she deserves. You may be partners but you are in direct competition with each other. In a sense, your productivity will help the business grow in general.

The corporate split method is another option. This is pretty standard. You start by paying yourselves a certain amount as your salary for a particular month based on what you have done. The other amount will then be used to pay bills. The rest will then be split 50-50. You can learn how to split profit along the way, but it can quite confusing. You will still go through a lot as partners, so you need to be clear about how the partnership will work especially when it comes to profit splitting. The key is to have an agreement before you do anything as partners and have this in writing.

Deal with the problems together

Aside from the profits, you also have to think about how you will deal with the issues you will face together. It is more important as business partners. Profits are easier to divide when there is a huge amount of money that both of you will enjoy. But you must also have a clear way of dealing with any problems, regardless of their nature.

When it comes to financial issues, there might come a point when you have to borrow money. This can help keep the company going or expand what you have already started. You need to think about it as a team so that you will know where to borrow the money, when to borrow and how much to borrow. You should also be financially stable so it is easier for you to get the money that you need the next time.

It is fun having a partner who will be with you through any ups and downs. However, there are relationships that have broken down over the years because of business partnerships. When the agreement is clear right from the beginning, this should be avoided. You will keep moving forward because you are focused on the welfare of the business in general. 

About the author:  Bernadine Racoma is a senior content writer at Day Translations, a human translation services company. After her long stint as an international civil servant and traveling the world for 22 years, she has aggressively pursued her interest in writing and research. Like her poetry, she writes everything from the heart, and she treats each written piece a work of art. She loves dogs! You can find Bernadine Racoma at Google Plus, on Facebook and Twitter.

Edited by Mandi Nowitz
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