A percentage split of company between two people

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JohnDS

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Suffolk, Long Island
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Electrician
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?
 
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.
 
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
 
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).
 
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.

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

hbiss said:
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
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So you are resembling scenario 1) as well?

kwired said:
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).
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Scenario 2)?
 
JohnDS said:
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)?
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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.)
 
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.
 
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?
 
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JohnDS said:
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?
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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.
 
gadfly56 said:
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.
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this is the dumbest idea I have ever heard. party A should just work as an employee for party B.
 
All that, and doing a 50/50 split without any kind of tie-breaker pre-agreement is a recipe for disaster. If you want to split things evenly, do the ownership as 49.9%/50.1% so that one person is the majority owner and they can call the shots if there's a dispute.

Someone pointed out that the lawyers always make money on these things- either a little at the outset to write the agreements or a lot later to settle the disputes. I prefer to pay just a little up front.
 
gadfly56 said:
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.
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Well that is irrelevant. And this is why they still have stuff called "cash". And besides, not that I agree with it or condone what I'm about to say next, but isn't this no different than paying an illegal alien to work for you, a major problem in this country we are battling at this very moment? I am sure somewhere a long the line you have done this. Just to be clear, party A) has no legal rights to company.

Can we continue please?
 
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Although no shareholder is required to loan money to the company, yes it is only fair that the 30% shareholder only loan 30% of the monies needed.

However, I hope you only have to do this once. After the first job is done and the payment is collected, and all the loans are paid off, don't distribute all of the profit. Keep some around for working capital.

Note that you'll have to both be paid as w2 employees if you're an officer of the company and or doing more than a minor amount of work for the company. You'll need to pay your friend a reasonable salary for the work he's performing for the company.

The best way for your friend to shelter this money would be for the company to only pay his salary and not pay him any dividends until a reasonable amount of time after the divorce. He could even borrow the money from the company, with interest, if he needed access to the money sooner. However, the corporation will pay taxes on the retained profit, and then your friend will also pay taxes when he is eventually paid the dividends. In essence, being double taxed, although there will be no employment taxes on this income. Additionally, if the company retains $100,000 in profit instead of distributing it, your friend now has $70,000 equity in a company, which the divorce court may not like.

Since you are doing very little work for the company, you don't need to take a very high salary. So most of your money can be paid in dividends exempt from employment taxes. Additionally, your employer is possibly maxing out your FICA contributions, meaning lower employment taxes even on the salary you do take from the company. You will get the greatest tax shelter benefits, not your friend.
 
Mark A. said:
Although no shareholder is required to loan money to the company, yes it is only fair that the 30% shareholder only loan 30% of the monies needed.

However, I hope you only have to do this once. After the first job is done and the payment is collected, and all the loans are paid off, don't distribute all of the profit. Keep some around for working capital.

Note that you'll have to both be paid as w2 employees if you're an officer of the company and or doing more than a minor amount of work for the company. You'll need to pay your friend a reasonable salary for the work he's performing for the company.

The best way for your friend to shelter this money would be for the company to only pay his salary and not pay him any dividends until a reasonable amount of time after the divorce. He could even borrow the money from the company, with interest, if he needed access to the money sooner. However, the corporation will pay taxes on the retained profit, and then your friend will also pay taxes when he is eventually paid the dividends. In essence, being double taxed, although there will be no employment taxes on this income. Additionally, if the company retains $100,000 in profit instead of distributing it, your friend now has $70,000 equity in a company, which the divorce court may not like.

Since you are doing very little work for the company, you don't need to take a very high salary. So most of your money can be paid in dividends exempt from employment taxes. Additionally, your employer is possibly maxing out your FICA contributions, meaning lower employment taxes even on the salary you do take from the company. You will get the greatest tax shelter benefits, not your friend.
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Thank you very much for your time in answering that. And to all as well.
 
gadfly56 said:
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.
Click to expand...

no, they are trying to figure out how to steal more chain than
they can swim with. should person A have 70% more than they
can swim with, or 30% more?

as for completely trustworthy, my experience is, that something
a person will do to someone, they will do to anyone, if there is
an incentive in it for them.

you'll want to watch carefully how hiding assets is done in this
instance, so you'll recognize it when it's done to you.

70% of what? no, there is no profit left on the job. let me show you....
 
What you are splitting is profit. Profit is arrived at by taking all income and subtracting all expenses. What's left over is split. Before that point it's neither of yours and it's just confusing to think of who's is what before that point.
 
petersonra said:
this is the dumbest idea I have ever heard. party A should just work as an employee for party B.
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Party A is going to end up as an employee no matter what they do.

If he can't be shown to have any legal ownership of the business then all they are trying to do is figure out how much he should be paid ( percentage off the books).
 
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