VillageTreats
02-07-2012, 07:39 PM
I am about to be in the same situation. My partner is the money and I am the knowledge and work. Besides the daily running I am also the one who will be in charge of production. (ie I make it all myself with the other partner supplying the goods) He has proposed .....
This will be a partnership between PARTNER 1 and PARTNER 2(ME) that eventually merges as one company (LLC corporation) after a three year period.
o Equity will be split between PARTNER 1 and PARTNER 2 50% each.
o Equity will have a three year vesting period (33% each year).
§ If either party breaks away from the partnership before the 1st year, the new company is dissolved and ownership of assets will be divided:
· PARTNER 2 will retain 100% of previous business (I own a similar business to the new one) and will be free to operate independently without any liability.
· PARTNER 2 will:
o Retain any liabilities incurred by the new company
o Take ownership of any assets which where obtained during the creation and operation of the new company
§ If either party breaks away from the agreement beyond any vesting period ownership of each side is equal to that vesting period. So for example if the company dissolved after one year, PARTNER 1 would own 33% of PARTNER 2's previous business (or any other entity name which sold the same product) and PARTNER 2 would own 33% of the assets of the new business.
· The new business name is the TO BE DETERMINED and day one we will operate as if it were a fully vested LLC. Actual vested ownership is only relevant in the event one of the parties walks away from the business.
o Since PARTNER 2's business is an existing business we will need estimates for sales, profits/loss and expenses so that it will not be contested in the event of any dissolution.
o Understand that once entered into this business it is expected that all of new sales from that point, regardless of the source, will be paid to the new company (e.g.: PARTNER2's business sales). This excludes any pre-existing inventory which will be at operational discretion to sell to the new company as long as the transaction does not come at a loss.
· Obligations
o PARTNER 1 is responsible for all financial requirements of the new company which the new company is not able to fund through its own operational receipts.
§ This includes all capital expenditures.
§ Kitchen expenses
§ Cooking expenses
§ Product expenses
§ Computer / web / communications
§ Point of sale infrastructure
o PARTNER 2 is responsible for all operational aspects of the new company.
§ Stocking the shelves
§ Purchasing (we will create a mechanism for this through PARTNER 1's business accounting)
§ Labor
§ Maintaining content on web
o As it is in all of our best interest to have a successful / profitable business, PARTNER 1 will provide assistance in any way it can operationally.
o PARTNER 2 will be responsible for manning the store and is only guaranteed labor reimbursement as laid out further in this outline (financial priorities)
· Voting rights.
o As with any corporation the power to make decisions is directly related to the ownership. In this arrangement financial decisions are made by PARTNER 1 management and operational decisions are made by PARTNER 2. However there will always be situations where we will need to decide between us which direction to take.
o Because we are equal partners this presents the possibility of a deadlock situation. All deadlock situations can be broken by the acting President of PARTNER 1's business which at the time of this arrangement is PARTNER 1.
· Financial Priorities. How revenue from the operation is allocated.
o First priority spending (listed in order of importance)
§ Taxes (sales and labor)
§ Product purchases (any material such as Chocolate) which we use to stock our shelves
§ Accounting
§ Level 1 Advertising (TBD amount)
§ General operational expenses not including labor
o Second priority spending (any money remaining after first priority spending)
§ Labor
§ Salary for PARTNER 2 (TBD)
§ Level 2 Advertising (Discretionary and agreed to between principles)
o Third priority spending (any money remaining after second priority spending)
§ Equity distributions voted on one time per month
§ Distributions are split based on ownership in the company. Since we are equal owners, that amount is equally split. E.g.: If the company decided to do a $100 disbursement, $50 would go to each party.
· Issuing shares of the company. The way that ownership is established in a corporation is based on shares of stock allocated. If our corporation is started with 1000 shares of stock PARTNER 2 would receive 500 and PARTNER 1 would receive 500. In the unlikely event that we decided to raise capital for the company this is done by issuing more stock which dilutes the ownership percentage for all existing shares.
o In the unlikely event additional shares are issued, dilution is equal among the two partners and additional shares are not allowed to be issued which will be provided to either party. Sometimes this type of activity is done in order to push someone out of ownership power and we are simply stating here that this is not allowed.
My questions: How do we determine a salary for PARTNER 2 based on me doing all the production and all the sales (retail)?
Am I missing something vital here? I don't want to go into this blind, deaf or dumb to what I need to know and do. I have been trying to due my due diligence prior to us signing anything but that time is nearing. Any help is appreciated.
There are also some very capital intensive businesses and some at the other end of the spectrum that need very little capital but lots of talent and labor. While 50/50 may be a rule of thumb, it is just that. There is no "one size fits all" when it comes to splitting partnership profits.
Also, the salary needs to be taken into account. If the working partner is being paid full value for his services, plus 50% of the profits, while the capital partner is only getting 50% of the profits, what is the working partner actually contributing? In many businesses, a reduced salary (at least for some period) is the "equity" in "sweat equity." Alternatively, the capital partner gets his original investment out with a reasonable return (but not at a venture capital return rate of 35-40%), the working partner gets a reasonable salary, and they split what is left over.
This will be a partnership between PARTNER 1 and PARTNER 2(ME) that eventually merges as one company (LLC corporation) after a three year period.
o Equity will be split between PARTNER 1 and PARTNER 2 50% each.
o Equity will have a three year vesting period (33% each year).
§ If either party breaks away from the partnership before the 1st year, the new company is dissolved and ownership of assets will be divided:
· PARTNER 2 will retain 100% of previous business (I own a similar business to the new one) and will be free to operate independently without any liability.
· PARTNER 2 will:
o Retain any liabilities incurred by the new company
o Take ownership of any assets which where obtained during the creation and operation of the new company
§ If either party breaks away from the agreement beyond any vesting period ownership of each side is equal to that vesting period. So for example if the company dissolved after one year, PARTNER 1 would own 33% of PARTNER 2's previous business (or any other entity name which sold the same product) and PARTNER 2 would own 33% of the assets of the new business.
· The new business name is the TO BE DETERMINED and day one we will operate as if it were a fully vested LLC. Actual vested ownership is only relevant in the event one of the parties walks away from the business.
o Since PARTNER 2's business is an existing business we will need estimates for sales, profits/loss and expenses so that it will not be contested in the event of any dissolution.
o Understand that once entered into this business it is expected that all of new sales from that point, regardless of the source, will be paid to the new company (e.g.: PARTNER2's business sales). This excludes any pre-existing inventory which will be at operational discretion to sell to the new company as long as the transaction does not come at a loss.
· Obligations
o PARTNER 1 is responsible for all financial requirements of the new company which the new company is not able to fund through its own operational receipts.
§ This includes all capital expenditures.
§ Kitchen expenses
§ Cooking expenses
§ Product expenses
§ Computer / web / communications
§ Point of sale infrastructure
o PARTNER 2 is responsible for all operational aspects of the new company.
§ Stocking the shelves
§ Purchasing (we will create a mechanism for this through PARTNER 1's business accounting)
§ Labor
§ Maintaining content on web
o As it is in all of our best interest to have a successful / profitable business, PARTNER 1 will provide assistance in any way it can operationally.
o PARTNER 2 will be responsible for manning the store and is only guaranteed labor reimbursement as laid out further in this outline (financial priorities)
· Voting rights.
o As with any corporation the power to make decisions is directly related to the ownership. In this arrangement financial decisions are made by PARTNER 1 management and operational decisions are made by PARTNER 2. However there will always be situations where we will need to decide between us which direction to take.
o Because we are equal partners this presents the possibility of a deadlock situation. All deadlock situations can be broken by the acting President of PARTNER 1's business which at the time of this arrangement is PARTNER 1.
· Financial Priorities. How revenue from the operation is allocated.
o First priority spending (listed in order of importance)
§ Taxes (sales and labor)
§ Product purchases (any material such as Chocolate) which we use to stock our shelves
§ Accounting
§ Level 1 Advertising (TBD amount)
§ General operational expenses not including labor
o Second priority spending (any money remaining after first priority spending)
§ Labor
§ Salary for PARTNER 2 (TBD)
§ Level 2 Advertising (Discretionary and agreed to between principles)
o Third priority spending (any money remaining after second priority spending)
§ Equity distributions voted on one time per month
§ Distributions are split based on ownership in the company. Since we are equal owners, that amount is equally split. E.g.: If the company decided to do a $100 disbursement, $50 would go to each party.
· Issuing shares of the company. The way that ownership is established in a corporation is based on shares of stock allocated. If our corporation is started with 1000 shares of stock PARTNER 2 would receive 500 and PARTNER 1 would receive 500. In the unlikely event that we decided to raise capital for the company this is done by issuing more stock which dilutes the ownership percentage for all existing shares.
o In the unlikely event additional shares are issued, dilution is equal among the two partners and additional shares are not allowed to be issued which will be provided to either party. Sometimes this type of activity is done in order to push someone out of ownership power and we are simply stating here that this is not allowed.
My questions: How do we determine a salary for PARTNER 2 based on me doing all the production and all the sales (retail)?
Am I missing something vital here? I don't want to go into this blind, deaf or dumb to what I need to know and do. I have been trying to due my due diligence prior to us signing anything but that time is nearing. Any help is appreciated.
There are also some very capital intensive businesses and some at the other end of the spectrum that need very little capital but lots of talent and labor. While 50/50 may be a rule of thumb, it is just that. There is no "one size fits all" when it comes to splitting partnership profits.
Also, the salary needs to be taken into account. If the working partner is being paid full value for his services, plus 50% of the profits, while the capital partner is only getting 50% of the profits, what is the working partner actually contributing? In many businesses, a reduced salary (at least for some period) is the "equity" in "sweat equity." Alternatively, the capital partner gets his original investment out with a reasonable return (but not at a venture capital return rate of 35-40%), the working partner gets a reasonable salary, and they split what is left over.