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3 people start a business together. All 3 buy all their own necessary materials. They agree to split all profit equally . But it turns out one person does most the work with little help. Should they still equally split the profit?
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Amandapotts
Jsbalzer Answered question
The sweat equity vs capital contributed split is the 2nd or 3rd most common post formation problem. Since Peter already answered the question of what to do after the horses are already out of the barn if you left the barn door open I will try to cover some practical advice on how to setup your partnership in the first place to avoid this problem.
1. Do not just download and sign a form operating agreement! Downloaded forms are like tools. Just because you can buy a welder doesnt mean you know how to use it.
2. Discuss and agree on hours contributed or tasks completed in exchange for Equity or compensation.
3. Consider having different shares of profit splitting versus voting shares many people don’t realize you can do this but often this solves the problem of people who contribute more work deserving more profit but the person who contributed a lot of capital and does no work may want the majority of the voting shares
Jsbalzer Answered question
The sweat equity vs capital contributed split is the 2nd or 3rd most common post formation problem. Since Peter already answered the question of what to do after the horses are already out of the barn if you left the barn door open I will try to cover some practical advice on how to setup your partnership in the first place to avoid this problem.
1. Do not just download and sign a form operating agreement! Downloaded forms are like tools. Just because you can buy a welder doesnt mean you know how to use it.
2. Discuss and agree on hours contributed or tasks completed in exchange for Equity or compensation.
3. Consider having different shares of profit splitting versus voting shares many people don’t realize you can do this but often this solves the problem of people who contribute more work deserving more profit but the person who contributed a lot of capital and does no work may want the majority of the voting shares
Jsbalzer Answered question
It certainly is not fair or equitable for one person to do all the work while the other 2 are able to profit and benefit. If you make an agreement then you are most likely bound by the agreement you entered. If the agreement was written versus oral it still binds you to the terms of the agreement. If this is deemed a partnership then any omitted terms of an agreement are completed via the Uniform Partnership Agreement. If you formed an LLC or corporation then the operating agreement or minutes may bind you. If the agreement was based on fraud-a false statement-then the agreement may be rescinded. A rescinded agreement will be deemed as if no agreement existed based upon fraud. There are many other issues here and a lawyer may be necessary to resolve if the 3 parties disagree.
Peterbronz Answered question
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Peter is right from a legal point of view and if you don’t think there was fraud involved, let me add a couple of thoughts form an entrepreneurial perspective which you might want to address in amicable terms with your partners. Hypothetically, If the 3 partners where to resign (stay as stockholders buy resign as employees) how much would the company have to pay in compensation to replace the 3 of you with similar experience and backgrounds? a practical solution could be to start drawing a salary that would be in line with what each of you contribute and at the end of your fiscal year, you distribute profits according to your equity position in the organization. That might be a way to level the playing field a bit. Partnerships are tough and once there is money involved all sorts of things happen. Get a good lawyer to amend your operating agreement to address the issue in hand plus, at the same time, solve all sort of other problems that will happen in the lifetime of your organization. You probably haven’t thought of what would happen if one of the partners passed away suddenly? who gets his/her shares, what if the relative inheriting his/her shares has no clue about your business? or what if one of you gets a divorce? do you really want an angry ex as your new partner? It has happened… Set rules of engagement now before it’s too late. Add a “shotgun clause” that could save you thousands of dollars in the valuation of the business if one of you wanted to split. Before you get a lawyer involved be transparent and have an open conversation trying to reach an agreement before spending a lot on legal fees.