frustrated in mn

Discussion in 'Growing and Managing a Business' started by frustrated, Sep 29, 2011.

  1. frustrated

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    Sep 29, 2011
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    I will try to be direct and to the point. I am a coowner of a partnership where I own 50% and the other 2 owners each own 25% each. The 3 owners each work appoximately 30 hours per week. Recently one of the partners has stated that he wants to be paid hourly on top of his monthly distribution check. The business has been open for 13 months. His argument is that if he isnt working there then we would have to pay someone else to work there. My argument is that because we are not equal partners taking a check for hours worked lowers the net profit of the business thus lowering the net profits of the business. As majority owner I will take a pay cut and the 2 minority owners will get a pay increase. Someone please explain to me the argument that I have for "if he doesnt work then we pay someone else to work". ?! This has to be a relatively common issue but Im missing the resolution. HELP PLEASE! Also, we do not have a formal partnership agreement so RUPA of minnesota would dictate that my vote constitutes 50% and their votes the other 50%=deadlock.
  2. ArcSine

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    Jun 2, 2010
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    If the biz is operating in the black, you're correct that if the three partners begin taking equal salaries (for equal # of hours worked), such change would shift some of the total profits from your pocket to theirs.

    Suppose the company is currently profiting to the tune of 100 per week, and it's being split 50 / 25 / 25. Now suppose the three of you begin taking a salary of 20 each, in recognition of the labor hours. The remaining profit (40) continues to be split 50% / 25% / 25%. Then your total income drops from 50 to 40, while that of your two partners increases from 25 to 30.

    The larger the salary, as a % of the total company profits, the more extreme the redistribution from your pocket to theirs.

    This will ultimately come down to negotiation among the partners. But perhaps the following general points can help you set a framework on which the negotiations can be formed...

    • At one extreme, if the profits are attributable solely to the non-labor contributions of the partners (e.g., technical know-how, contributions of capital, patent on a key device or process, industry contacts, etc.), then the profits should be split solely on the relative values of these inputs. If 50/25/25 represents the agreed-upon relative values of what the three partners bring to the table, then that's how the profits should be allocated.
    • At the other end of the spectrum, if the profits are due solely to the day-to-day labor of the partners, then the profits should be allocated solely according to # of hours worked.
    • The answer is surely somewhere in between; that is, the profits arise from a combination of various tangible and intangible assets the partners bring to the biz, plus the daily labor. Hence you'd need to set a salary / profit split arrangement that recognizes the relative value of daily labor vs. the non-labor inputs from each partner; that is, where along the spectrum does your particular situation lie?
    • The one partner has a vaild economic point: It would foolish of him to work 30 hours a week in your partnership, IF he could earn more by doing the same work, for the same 30 hours, elsewhere. Hence, whatever salary / profit share combo he receives from your biz, it'd have to be >= the salary he could get elsewhere, in order for it to make economic sense to him that he remains at your company.
    • But that same argument from your partner has two sides: If the partner's current 25% share exceeds the salary he'd earn as a 30-hour employee elsewhere, then he has nothing to complain about. Similarly, perhaps you could replace this partner with a 30-hour, salary-only employee, with no share of residual profits---that might put more money in your pocket. If your partner wants a salary and profit-% combo that exceeds the amount you'd have to pay for someone to come in and do his job (assuming the biz wouldn't suffer from the loss of any key non-labor inputs derived from this partner), well then, he's pricing himself out of the market.

    In the end it'll come down to hammering out a deal at the negotiation table. But maybe the above points can help in that process. Best of luck with it!
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