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Partnerships and Salaries?

Discussion in 'Business Operations' started by Team-Green L&L, Jan 11, 2007.

  1. Team-Green L&L

    Team-Green L&L LawnSite Bronze Member
    Messages: 1,775

    Here's a good one.

    Partner A starts a company and maintains steady work, but no growth for 5 years. He owns 100% of the equipment, but has no time to grow the company.

    Partner B is awarded minority ownership from time and efforts in growing said company.

    Now a new season begins: Partner A invests 20-25 hours weekly in production due to other commitments. Partner B invests 50-60 hrs. weekly into field production as well as grows the internal structure of the company from ground up.

    Partner A feels he should be paid a higher salary than Partner B considering ownership values.

    The question is this: If Partner B reduced the potential profits of the company by retaining a higher salary, how does the ownership of the company get affected?

    Please do not reply unless you have personal knowledge in the situation.
  2. Mr. Vern

    Mr. Vern LawnSite Senior Member
    Messages: 632

    I will try to give a simple explanation of the approach I use with one of my partnerships. Not sure it will directly answer the question but it might add some insight.

    We pay each partner a salary directly based upon the work they do for the company. For example as General Manager I get a salary commensurate with those responsibilities and the competitive rate for our industry and area. My partner's wife works as a Marketing and Sales Manager. She gets a competitive salary for that. Basically we get a salary for work performed.

    The other piece of the puzzle is the dividends. When we look at the profits, we get together and decide how much of that should be reinvested to grow the company and how much we want to take out for dividends. Once we decide how much to pay in dividends, it is simple math to determine who gets what based on percentage of ownership.

    Now, in the spirit of this approach we obviously use some other mechanisms available to limit the tax liabilities and such, but this is how we "equitably" distribute the earnings.

    Looking at the scenario you describe; I would work out how much of a partnership percentage was earned by the labor invested, and then determine if partner B was still working for increased interest in the company or just a salary plus the increased value of his investment. For instance, did he work for free 1 year to gain 10% ownership? If so, does he work another year and gain another 10% or does he keep the 10% and start drawing a salary in year 2. He would then be working for the salary plus the hope that his 10% of said company would increase in value (not in percentage) as the company's value increases. And of course dividends on that 10% if profit is good.

    Hope that helps.

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