Business startup between two people going south.

[Xinchao]

Hi there,

This is my first time here. So I hope I have posted in the correct forum.
Since time is money, I will try and explain everything as clearly as possible
in the hope that someone may try to offer their own opinion/experience.
I set up a company (sole trader) to avail of a business grant. The company
is a food company (raw produce). We have been in operation for over 18 months.
Unofficially, I set up the company with another person. We decided to go on a gentleman's
agreement of a 50/50 split. However, very quickly I realized I was doing the lion's share of the work.
I started to put in more money, secure loans in my name and in fact everything is in my name.
The issue I have is that my business partner doesn't realize how much work goes in to everything.
I did all the research, designed the business' infrastructure, sourced the materials, equipment, designed the logo, marketing
etc etc..
We needed to expand so i secured family loans and business loans and since I am a sole trader they are all personally guaranteed.
My business partner cannot commit to the business as they have kids and have to collect them from school etc. Therefore over a given year
I do more sweat equity about 70% more than my partner. All in all I feel it's slowly becoming my business in that I have accepted all the
responsibility. My business partner hasn't got a clue what is involved in running a business and thinks it's easy. I have tried to share
certain responsibilities on the admin side but they were unable to do it. So I had to jump in and take over otherwise it would have been too late.

This is a very, very labor intensive business and I need my business partner in that capacity. We are not taking any money from the business
as of yet but next year my money runs out. I have a far greater need to drive the business forward than my partner does as my business partner's spouse
is working. This is holding the business back in some regards as the risk for my business partner is not there financially...
It came to a head recently when I became exasperated by this issue and got in to an argument about not pulling their weight. That led to all sorts of
back and forth stuff. My business partner accused me of trying to take over the business...I said I didn't but I just capitulated because I know if
they walk I am in dire straits... The business is picking up quickly but all the money is being plowed back in to ensure next year starts at best as possible.
I also should add that I deal with all the customers, doing all the accounting, banking, insurance, purchasing etc...
How should I approach my business partner with a new "deal" in that I feel that they should only get 20% rather than 50% considering what work goes in. My business partner said that if officially they became a full partner childcare would need to be covered as well as other expenses but the business can't afford that right now...

Any suggestions?

Thanks for reading.

Xinchao.

[Fulcrum]

So who owns what on paper and at what percentage? If your partner's name isn't listed, buy him out for what cash he has put in (honor the existing agreement that way) and hire out for the work that needs to be done.

You also need to be tracking exactly how much you are owed by the company through deferred wages (keep it reasonable and let's say $500/week). The same goes for your partner. Wages, even those owed to an owner, are an expense and need to be accounted for. All expenses (including wages) get paid before owners take profit. If your partner demands 50%, than he gets 50% of the PROFIT AFTER ALL EXPENSES, INCLUDING WAGES HAVE BEEN PAID.

To sum up, wages are not profit. Wages are an expense and need to be treated as such. If your partner cannot, or refuses, to accept that than you need to end the partnership ASAP.

[Xinchao]

Thanks for the advice. The company itself is still in startup mode. No one is taking wages.
My name is on everything, i.e. 100% mine. The company is registered in my name etc. Everything is.
It will take another 8 to 12 months before the company is fully operational. But i want to change the split
to reflect my input .i.e money, sweat equity and operational control/decision-making
Just stuck how to divide it up really.

[Fulcrum]

Contrary to popular belief, labor doesn't dictate ownership stake. Take your labor out of the equation. Keep track of it as a deferred (meaning not taken at this time) expense and pay it out once profitable and you have a good cushion in the bank. The same can, and should, be applied to work your partner performs.

He who puts the most cash at risk gets the controlling interest unless other arrangements have been agreed upon.

What, exactly, has your partner brought to the company?

[tallen]

I am totally with Fulcrum, you first need to account for the energy and effort that each person is putting in to the business by "paying" appropriate compensation for work done -- this represents a pre-profit expense to the business, even if it is only accounted for on paper and no actual money is exchanged. These un-paid wages would accumulate in "liability accounts" on the company's books and essentially represent a sort of loan to the business from each of the workers... (until such time as the company is generating a healthy positive cash flow and can afford to pay off these "loans").

Second, what is the basis for deciding the split should be 50/50? Did the "partner" put in half of the start-up capital? If not, is the "partner" building his or her equity through "sweat" (work done for the company, accounted for as above)? Or did the "partner" provide significant "intellectual capital" in the form of key ideas necessary to make the business what it is? If none of these things, then what other value does the "partner" bring to warrant a 50% share of the NET profits?

If you own all of the assets of the business outright as a sole trader, and none of the questions above can be answered in the affirmative, then this other person is NOT a true business partner, but rather an employee with whom you have established a profit-sharing arrangement, as part of their compensation package for the work they do for the company. As the owner of the company, it is totally up to you to decide what the appropriate split is -- of course you might not want to rock the boat if changing the arrangement could cause the other person to walk away and you really need their labor for the company to prosper, especially if they have special skills or knowledge deemed "irreplaceable" (a faustian bargain faced by most business owners!).

This is all by gentleman's agreement, and I appreciate the angst you are feeling about wanting the stand by your word, but ultimately you need to get it all down in writing -- there is nothing like a good contract to clarify the air!

(Edit: I was still writing my wordy treatise as Fulcrum was posting his succinct comment!)

[Harold Mansfield]

First of understand that I have no patience, or sympathy for people who want all the rewards but won't put in the work. Won't learn. Won't sacrifice. That just expect things to happen by magic and sit back and let others do all the work. It burns me up.

With that said....

Business can ruin a friendship. A lot of people want to BE in business, but it is rare that all parties understand what it takes to open, run and grow a businesses.

The way I see it you have 2 options:

1. Hash out a real legal agreement, with real terms, with you taking a majority share because as you said it's all in your name and you've come up with all the financing. In my book that makes you 100% owner and him an employee.

I understand you want to keep your word, but it's not working out that way. He's not doing 50% of anything. If you don't this will probably ruin the business and the friendship and you will have put NOTHING on paper to save the business.

2. Do nothing, let it fester until it explodes ruining the friendship and the business.

Neither option is pleasant, but accept that it's this way because you didn't take care of the legal when you were supposed to, so now correct it before it's too late. The friendship looks like it's going south either way as you've probably lost all respect for him and resent him at this point, so at least take care of business.

Friendship is friendship. Business is business. If he can't separate the two and start pulling his weight, get rid of him or he'll cause you to lose everything.

[Xinchao]

Thanks to you all for the advice.
I feel that the writing is on the wall regarding the partnership. I'm going to speak to my
accountant and explain what I'd like to do. I'm doing everything. He is not. He drops tools
and heads home to the family while I do everything else including putting more physical work hours
then I head home, research, do the books, banking before work, contact suppliers, deal with customers,
etc etc....I get you all and I felt the same but I needed clarification that my feelings were right.
I'll get all my ducks in a row and sit him down and explain everything.

Thanks again.

Xinchao.

[Harold Mansfield]

Tough situation. Good luck and keep us posted.