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Thread: industrial partner

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    van
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    Default industrial partner

    hello. i'm new here. i decided to join as i saw the other threads as being very helpful-- and i was hoping you guys can help with my question.

    i was wondering if anyone's familiar with industrial partners? i'm not that familiar with the terms and conditions of having this type of partner, but from how i understand it, starting a business, this partner does not put in any financial capital. his share is from his skill/service input into the business. my question is, does an industrial partner get a monthly salary like the other partners who handle operation and marketing but have financial share/investment in the company?

    thanks!

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    You can set it up however you all agree. To my mind, the financial input and the physical work input are separate things, to be considered separately - Partner A might put money in and do no work, Partner B may work but have no financial stake, and Partner C might have a financial interest and work in the business. You could set it up as a partnership - with all the ramifications of a partnership - or simply incorporate and hire for a salary those who will work and sell shares to those who will invest financial value.

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    van
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    Hi, spider! thanks for the reply. I just find it a bit tricky. We are 3 in the business (hehe, it's just a modest one, nothing spectacular). Partner A and B both shoulder the financial investment and have 40% share each in the company. In terms of work, A will handle operations, B will handle marketing.

    Partner C has no financial input but is given a 20% share for his equivalent skill input. Logically, A and B, on top of being company owners, are technically employees for the role they play and are given salaries.

    I am thinking Partner C (IT skill) shouldn't have a salary as his work is the investment he's putting in in lieu of money that awards him 20% share. I think I'm looking at it correctly but it feels quite weird to make him work 9-5 (like Partner A and B's sked) without pay though... but his work is his investment...right?

    i was thinking that he be given an allowance? But to be fair, whatever amount this allowance is should also be additionally given to A and B as well, right? but this is too much of a financial drain for a starting business, so I guess this wouldn't work now....

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    Member With Stressed Keyboard Array sequoiapayroll's Avatar
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    Knowing what type of business this is would really help...

    As mentioned, you can set this up however you want. Partner "C" is being paid for the skill he brings to the table. You can get different opinions on this all day long, but if you want my .02, It seems fair to pay him 20%. He may not be putting money into the business, but IT knowledge is very valuable, especially if you plan on having any type of business presence on the web. It is also valuable if you plan on expanding your business in any way. Think about it, if you want to set up a phone system for an office, he can do that. If you need to network computers, or create internal e-mail, he can do that as well.

    I do have a question, If partners A&B are given 80% collectively and partner C gets 20%, where will the "salaries" come from?

    My opinion: Get an LLC partnership, Invest your money, set everyone up with a small salary. I would pay "C" according to the work he is doing. If the other two partners are doing more work, pay them more. At the end of the year (or quarterly, or whatever) do a profit share option to divvy out the remaining funds as desired.
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    van
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    hi, sequioa! thanks for your thoughts. re salaries: it'll be scheduled eventually when sales are satisfactory and can sustain such. it won't be in the immediate 6 mos or maybe year after the business begins, but if things are already profitable, we are considering retroactive partial compensation and/or commencement of regular salary... and yup the 40-40-20 is just a guide how to disburse allotted x profit.

    the set up we're looking at is forming a corporation. Though it is net based, the IT is quite simple and we can actually commission someone to make and maintain it. We have 4 on file actually should we got that way. On the scale of tasks, the most burdensome would be marketing.

    re giving the industrial partner a salary, the thing that "bothers" me is that, how's this arrangement more advantageous than just hiring him as an employee then? the reason why we (partners A and B) considered giving him a share is for him to be personally invested in the creation and improvement of IT side and, more importantly, to minimize/zero the IT expenses of this start up. He doesn't want to put in cash -- what will deserve him his 20% share? If he gets a salary, we're virtually paying him to be a partner?... There's no offering on his part. Maybe limited time without salary compared to Partners A&B?

    what do you think? sorry, i'm not that familiar with this business practice and am still researching it. my own business is sole prop so this is the first time to explore this kind of partnership. please feel free to share anything you'd like.

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    I'm glad you have decided to incorporate. That means you will not actually be partners, although you may refer to yourselves as such.

    I see it like this.

    Mr.A. buys shares to whatever amount and that is his share in the business. (40&#37
    Mr.B. buys shares to whatever amount and that is his share in the business. (40%)
    Mr.C. does not buy any shares but has shares allocated to him for his expertise. (20%)

    Or, Mr.B. could be given shares over time to reward his continued involvement (eg. 10 shares for every month of employment up to a maximum of 20% of the total shareholding.)

    Whatever you all agree regarding the shares, that has nothing to do with salary. A salary and working hours, etc. should be agreed and paid for all parties. If one of them is not going to work, he doesn't get a salary. Those that work get a salary.

    Distribution of profits is made $X-amount per share paid to each of the shareholders.

    If you think of the shareholders as separate from the employees, you will find it easier to figure out.

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    van
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    hi, spider. i understand what you're saying but why do i still have this gnawing feeling about that arrangement? Sorry, i really don't mean to be difficult, i just need to convince myself that this is fair to be able to proceed with a clear head. please bear with me.

    I do recognize that being a shareholder and employee are two different things. I find it a bit off though for C to be given a 20% share as reward(!) for just being involved. Just like C, A and B are involved and assigned Marketing and Operations respectively because it's their expertise, but they put in financially to earn their 40%... you get where I'm coming from?

    Does this sound fair? Let's say 40%= $40,000, which means 20% = $20,000. He needs to put in 20k. When salaries do begin, partial deductions will be applied to his salary until the total deductions amounts to 20k, afterwhich he gets full salary.... does that make sense?

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    Member With Stressed Keyboard Array sequoiapayroll's Avatar
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    Quote Originally Posted by van View Post
    re giving the industrial partner a salary, the thing that "bothers" me is that, how's this arrangement more advantageous than just hiring him as an employee then? the reason why we (partners A and B) considered giving him a share is for him to be personally invested in the creation and improvement of IT side and, more importantly, to minimize/zero the IT expenses of this start up. He doesn't want to put in cash -- what will deserve him his 20% share? If he gets a salary, we're virtually paying him to be a partner?... There's no offering on his part. Maybe limited time without salary compared to Partners A&B?

    what do you think? sorry, i'm not that familiar with this business practice and am still researching it. my own business is sole prop so this is the first time to explore this kind of partnership. please feel free to share anything you'd like.

    Based on this, it sounds to me that you would rather pay him as an investor instead of an actual member of the corporation. And you can do that, if you want. If he were an investor, he would be investing time and "know-how" into the company, without a pay check. He would receive a portion of the net profit at the end of the year/quarter/whatever. He would not have any "ownership" in the company, however you would be tied to him financially for a set pre-determined period of time in a contract. If you would like to talk this through with someone, give me a call at 479-409-8284, my name is Josh. I am not trying to vie for your business, but we do handle incorporations for new businesses on a somewhat regular basis. No obligation, just a phone call. And maybe we can help shed some light on what would be the best move for this start up.
    tulsa accounting agency providing nationwide payroll services and do-it-yourself online payroll

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    Quote Originally Posted by van View Post
    hi, spider. i understand what you're saying but why do i still have this gnawing feeling about that arrangement? Sorry, i really don't mean to be difficult, i just need to convince myself that this is fair to be able to proceed with a clear head. please bear with me.
    .. I do recognize that being a shareholder and employee are two different things. I find it a bit off though for C to be given a 20% share as reward(!) for just being involved. Just like C, A and B are involved and assigned Marketing and Operations respectively because it's their expertise, but they put in financially to earn their 40%... you get where I'm coming from?
    .. Does this sound fair? Let's say 40%= $40,000, which means 20% = $20,000. He needs to put in 20k. When salaries do begin, partial deductions will be applied to his salary until the total deductions amounts to 20k, afterwhich he gets full salary.... does that make sense?
    Let's suppose you are starting a business in sports apparel, and Michael Jordan said he would like to be involved but didn't want to invest any money. Just having Michael Jordan part of the company would be enormously beneficial to you, and paying him 20% of the profits just to be able to use his name would be worth it, eh?

    Now, Is your man a "Michael Jordan" of the IT industry? If not, is there some value in having him part of the company? If not, why do you want to give him 20% ownership?

    Perhaps Mr.A. has the concept for the business and you need Mr.C, to make it happen. Is his expertise worth 20% ownership? If yes, you pay him whatever percentage ownership to bring him on board and tie him to the corporation, then pay him a salary to do the work he will have to do.

    Perhaps, Mr.C. is the concept person. Perhaps Mr.C. is Steve Jobs. Would you give Steve Jobs 20% of your company just to have him involved and come to a board meeting once a month? Would you also pay him a salary, too, so that he spends part of every day with you?

    If Mr.C. is just a nice guy with IT capability, couldn't you hire him - or any other IT person - without giving him a piece of the business? I would want Mr.C. to bring something for that 20%. That "something" could simply be continuity. If any IT person could do the job but changing IT person mid-stream would cause problems, delays, whatever, then giving him a percentage of the company does give him an incentive to stay and see the project through.

    I hope these thoughts help you get your mind at ease.

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    van
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    spider, i guess that's what it is. He is no Michael Jordan. He is competent and all that, but there is no premium about him per se that will advance the project exponentially. Applicant D, E and F can do what he's to do. In a nutshell, the #1 reason for this whole arrangement is to get a trade of some sort-- his 20% in exchange for the financial equivalent of his service/skill. That way, we can save on cash out for IT requirements. It seemed logical and fair in my head, but just got muddled when I put myself in his shoes and worried about day to day expenses if I didn't have a salary (although if things go right, a continuous hefty end of the year profit share).

    But if what you're saying is we have to pay him a salary on top of the 20% profit share, maybe this is a wrong arrangement to consider.

    That said, I'm considering sequoia's suggestion more... I may have been using the wrong words, but it sounds close to what we're thinking of... I see, it is not as a "partner", but the term is "investor" instead (or maybe special contractual supplier?) Hmmm....

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