Page 1 of 3 123 LastLast
Results 1 to 10 of 24

Thread: A percentage split of company between two people

  1. #1
    Join Date
    Mar 2007
    Posts
    149

    A percentage split of company between two people

    This is hypothetical but I was wondering what the fair and correct way to split a company with unequal percentages would be when it comes to profit, material, and any business associated expenses.

    Let's say two people agreed on a 70%/30% split of company going forward.

    Scenario 1) Would everything including profits, material costs, and other business expenses in the future be split 70%/30% meaning party A) would be responsible for 70% of material bill and business expenses while also getting 70% of the profit, and part B) would be responsible for 30% of material bill and business expenses while also getting 30% of profit?

    Or

    Scenario 2) Should material and business expenses be split 50%/50% and then profit 70%/30%?

    I'm really confused about this. What do you guys think? In my mind I'm thinking how can part B) pay half the material cost if only getting 30% of profit? Party B) would go broke after a while, no?

  2. #2
    Join Date
    Aug 2004
    Location
    Northern illinois
    Posts
    15,581
    There is no answer to the question you asked. It is all about what arrangement you made between you and your partner. It's not all that unusual for one partner to put up more of the funding than another or for one partner to do more of the work than the other. It is all about what kind of deal you can arrange between the two of you.

    Having said that in most cases all of the expenses come out of Revenue first before there is any profit split. One guy might get more of a split than the other because he brought more to the table.
    Bob

  3. #3
    Join Date
    Jun 2003
    Location
    Hawthorne, New York NEC: 2014
    Posts
    3,110
    That's because you are thinking a little to simplistically. Two individuals wouldn't form a business that way. Normally they would form a partnership, LLC or corp. Partner A contributes 70% of the capital and partner B contributes 30%. That in total would comprise the businesses' working capital from which all expenses are paid. A owns 70% of the business and B owns 30% so if, for instance, the business were to distribute profits at the end of the year, A would get 70% and B 30%.

    -Hal

  4. #4
    Join Date
    Dec 2007
    Location
    NE Nebraska
    Posts
    33,104
    There is no true profit until the bills are paid, so one entity typically doesn't pay 70% of the bills. If each entity has their own bank accounts and you did pay bills that way, to keep things in line you should ask clients for two payments, one for 70% one for 30%. But such method isn't really a partnership when it comes to business organization types, it is two entities that happen to be working together on a common project(s).

  5. #5
    Join Date
    Mar 2007
    Posts
    149
    Sorry guys, I am not entirely understanding. I would just like to know the more fair way to do it. I know that you can agree on anything but this may very well be reality.

    Quote Originally Posted by petersonra View Post
    Having said that in most cases all of the expenses come out of Revenue first before there is any profit split. One guy might get more of a split than the other because he brought more to the table.
    So are you saying that all expenses come out of each party's percentage first, resembling scenario 1)?

    Quote Originally Posted by hbiss View Post
    That's because you are thinking a little to simplistically. Two individuals wouldn't form a business that way. Normally they would form a partnership, LLC or corp. Partner A contributes 70% of the capital and partner B contributes 30%. That in total would comprise the businesses' working capital from which all expenses are paid. A owns 70% of the business and B owns 30% so if, for instance, the business were to distribute profits at the end of the year, A would get 70% and B 30%.

    -Hal
    So you are resembling scenario 1) as well?

    Quote Originally Posted by kwired View Post
    There is no true profit until the bills are paid, so one entity typically doesn't pay 70% of the bills. If each entity has their own bank accounts and you did pay bills that way, to keep things in line you should ask clients for two payments, one for 70% one for 30%. But such method isn't really a partnership when it comes to business organization types, it is two entities that happen to be working together on a common project(s).
    Scenario 2)?

  6. #6
    Join Date
    Oct 2007
    Location
    New Jersey
    Posts
    4,586
    Quote Originally Posted by JohnDS View Post
    Sorry guys, I am not entirely understanding. I would just like to know the more fair way to do it. I know that you can agree on anything but this may very well be reality.



    So are you saying that all expenses come out of each party's percentage first, resembling scenario 1)?



    So you are resembling scenario 1) as well?



    Scenario 2)?
    No lawyer (and you should each have your own when setting this up in the first place) would let you do "business" under Scenario 2). There are too many things wrong with it to adequately address in this kind of forum. Find a community college in your area and take some introductory business courses if you are even vaguely thinking of starting a business. They often have a bunch of courses geared to small businesses and small business owners (one-man shop, partners, etc.)

  7. #7
    Join Date
    Sep 2017
    Location
    Napa, CA, US
    Posts
    50
    I'm not a lawyer or an accountant, but I own 30% of a C Corp, and this is the way I understand it.

    Usually, the 70/30 stock split happens at the beginning by one person purchasing 70% of the stock, and the other person purchasing %30 of the stock.

    All money put in after that should be a loan to the company to be paid back with interest.

    Optionally, dilute and purchase more stock each time someone puts more money in, but that seems crazy to me.

  8. #8
    Join Date
    Mar 2007
    Posts
    149
    OK, let me be totally clear now that I am not typing on my phone. In this scenario, Party B) will always own 100% of company and assume liability.

    Party A) wants to go into a particular field of business he used to be involved in, but can't show his name on books because of divorce issues. Has all tools and is going to do the hands on work. (Party A) is a very trustworthy individual so no worries here). Willing to accept 70%.

    Party B) already has a company set up with bank account, business credit card account, insurance, blah blah blah. Does all billing to whomever. Assumes all responsibility and liability. Company currently makes no money so we are starting from a clean slate with no money invested. Willing to accept 30%.

    Material and company expenses:
    - Party A) will receive a company card from Party B) to make material bills easier at end of month to share as a percentage but that's what we are trying to figure out.

    Payments from customers:
    Checks come in and need to get cashed against Party B's) business bank account.

    Party A) and Party B) would like to do a 70%/30% split, party A)/party B).
    Party A) cannot be shown on paper so party B) in all reality couldn't send a 1099 to use party A's) income as a right off and would have to show that as their own income, I get that. That's why 25% of party A's) 70% payment will be withheld for income tax. Let's not get caught up on the percentage being withheld, I know brackets are a factor as well. I am hypothetically using the 25% withheld as an example.

    Ok so this is basically how the company will run. So far the agreement would be a 70%/30% split, Party A)/Party B).

    The profit is easy: Party A) 70% - approx. 25%(income tax)/Party B) 30%

    The business expenses and material is another story. I don't know what would be the way to handle this. 50/50 or 70/30?

    In my mind, Party B) is already taking a 20% cut so why would they have to come up with 50% of material bill still?
    Last edited by JohnDS; 09-28-17 at 10:52 AM.

  9. #9
    Join Date
    Oct 2007
    Location
    New Jersey
    Posts
    4,586
    Quote Originally Posted by JohnDS View Post
    OK, let me be totally clear now that I am not typing on my phone. In this scenario, Party B) will always own 100% of company and assume liability.

    Party A) wants to go into a particular field of business he used to be involved in, but can't show his name on books because of divorce issues. Has all tools and is going to do the hands on work. (Party A) is a very trustworthy individual so no worries here). Willing to accept 70%.

    Party B) already has a company set up with bank account, business credit card account, insurance, blah blah blah. Does all billing to whomever. Assumes all responsibility and liability. Company currently makes no money so we are starting from a clean slate with no money invested. Willing to accept 30%.

    Material and company expenses:
    - Party A) will receive a company card from Party B) to make material bills easier at end of month to share as a percentage but that's what we are trying to figure out.

    Payments from customers:
    Checks come in and need to get cashed against Party B's) business bank account.

    Party A) and Party B) would like to do a 70%/30% split, party A)/party B).
    Party A) cannot be shown on paper so party B) in all reality couldn't send a 1099 to use party A's) income as a right off and would have to show that as their own income, I get that. That's why 25% of party A's) 70% payment will be withheld for income tax. Let's not get caught up on the percentage being withheld, I know brackets are a factor as well. I am hypothetically using the 25% withheld as an example.

    Ok so this is basically how the company will run. So far the agreement would be a 70%/30% split, Party A)/Party B).

    The profit is easy: Party A) 70% - approx. 25%(income tax)/Party B) 30%

    The business expenses and material is another story. I don't know what would be the way to handle this. 50/50 or 70/30?

    In my mind, Party B) is already taking a 20% cut so why would they have to come up with 50% of material bill still?
    It sounds like Party A is trying to hide assets/income from discovery, which is potentially a criminal offense if this is a violation of a court order. Party B would be an idiot to go anywhere near this arrangement 'cause now he is potentially a co-conspirator.

  10. #10
    Join Date
    Jun 2003
    Location
    Hawthorne, New York NEC: 2014
    Posts
    3,110
    Now my head hurts. Ever heard the saying "Oh what a tangled web we weave when first we practice to deceive"?

    -Hal

Posting Permissions

  • You may not post new threads
  • You may not post replies
  • You may not post attachments
  • You may not edit your posts
  •