When you go into business with someone, one of the factors you need to consider is how you will share profits. This should be settled in an official, legal way before you start up as it will affect the type of company you are and your tax requirements.
Deciding how to split profits will affect what kind of company you will create.
From there, you need to follow the official steps and make it all legal. Almost everyone needs advice and assistance from a lawyer or accountant, both when considering the options and officially creating the company.
This guide will take you through what you need to know.
There are many different ways to split profits. It can be as simple as splitting them evenly down the middle or offering a base salary plus split profits.
You can also involve other variables like equity, commissions, bonuses and more.
Before making a decision on what's right for your company, you should know:
To answer these, consider:
You have almost complete control over how profits are split, but you should consider it carefully in light of all the factors involved. All partners must agree to a proposed arrangement before it can be set up.
Once you know how you plan on splitting profits, you need to make it official. This involves formalising both your business and the profit split agreement in writing.
Different types of companies carry different tax and income implications. Broadly speaking, you will in most circumstances either be registering a partnership or creating a company.
Easy and inexpensive to set up and operate, a partnership is an official association of people who do business together, splitting profits and losses among themselves.
Creating a partnership is a lightweight way of setting up a legal partnership agreement. It can be good for smaller and less organised business arrangements if there is little chance of legal liability issues or business bankruptcy.
A company is its own separate legal entity that pays its own taxes. Profits earned go through the company, as do losses and legal liability.
Creating a company is essential for many business partnerships. It also lets you split profits and ownership as desired.
The partnership agreement that you enter into will formally document the terms of the arrangement. This is used for auditing purposes or if there is ever a dispute between partners. Even if you're going into business with friends or family you should still keep it professional and set up a formal partnership agreement.
You are not legally required to have a formally documented profit split agreement, as the essential information will be required to register a company or partnership anyway, but it is still strongly recommended for your own convenience and efficiency, particularly if you have any doubts about your partner's willingness or ability to hold up their end of the bargain.
This should be a written document that details all the relevant information and how certain situations will be addressed:
The more detail the better. This partnership agreement will be referred to and held up if difficult situations arise, so it's a good idea to make sure it has the answers you need.
If you have an idea of how you want to split profits in a business partnership, discuss it with your future business partner and reach an agreement. Post that discuss it with a professional who can advise you on legally creating a partnership or company and putting the profit split into action.
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Can you change the profit split percentage of a partnership a few years after it was formed provided everyone agrees?
Hi S,
Thank you for your inquiry.
With business profit sharing, yes, you can change it after a few years so long you and your partner(s) agree. If you were unanimous to change the percentage share, best that you seek a lawyer to have the agreement legally arranged and consult an accountant for any tax implications the may result from the change.
Cheers,
May