How to split profit?

[n8236]

So my cousin and I are starting a company where we provide IT services, but we're having a hard time figuring out how to do the profit scheme.

Both of us will be trying to woo customers and once we do, we don't know how to split any profit. Should the one who gets a client have a set % of the profit or etc etc? We just can't think of a fair way to split the profit. If one of us gets a majority more customers than the other, that creates problems. If one of us gets a majority less customers, that creates a similar problem.

Any ideas appreciated

 

[NC MacGuy]

So my cousin and I are starting a company where we provide IT services, but we're having a hard time figuring out how to do the profit scheme.

Both of us will be trying to woo customers and once we do, we don't know how to split any profit. Should the one who gets a client have a set % of the profit or etc etc? We just can't think of a fair way to split the profit. If one of us gets a majority more customers than the other, that creates problems. If one of us gets a majority less customers, that creates a similar problem.

Any ideas appreciated

Sole Proprietorship, LLC, S Corp. or C Corp.?

 

[Blue Velvet]

Are you splitting expenses and overheads equally, regardless of who is doing what?

 

[Sun Baked]

Getting clients is called sales, and those who bring in sales can be paid a percentage/fee.

If he is good bringing in client and sucks at closing the deal, the closer may actually get a good chunk of that percentage/fee.

Make sure you pay yourselves a fair rate for the IT work you do, work with an accountant, and make sure the checks for above a certain $ amount require two signatures or the accountant to produce for signature.

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Then worry about the profits and split them in a fair manner.

Work out an exit strategy, so one person can either sell his share to the remaining person or another.

If someone is really good at selling and closing, then they could get a boost in earnings and you can hire someone to help do the grunt IT work.

 

[Surely]

Sole Proprietorship, LLC, S Corp. or C Corp.?

My thoughts exactly. Except you can nix the 'sole proprietorship' option since this business seems to involve two of them in an equal-sort of relationship, and add 'general partnership and LLP' to the mix.

It is important to set your business up properly, define both of your responsibilities, list all assets each of you are bringing in, and of course, determine how revenues and expenses will be shared.

Find yourself a small business advisor/accountant/lawyer to guide you through this, that way there is no controversy in the future.

 

[NC MacGuy]

My thoughts exactly. Except you can nix the 'sole proprietorship' option since this business seems to involve two of them in an equal-sort of relationship, and add 'general partnership and LLP' to the mix.

It is important to set your business up properly, define both of your responsibilities, list all assets each of you are bringing in, and of course, determine how revenues and expenses will be shared.

Find yourself a small business advisor/accountant/lawyer to guide you through this, that way there is no controversy in the future.

Exactly.

I was assuming that they may not be actually setting up a company but more starting a business together. If they expect to do $30-300k annually it may be easier to each have a sole proprietorship and collaborate by billing each other as contractors when needed. To give advice on profits there are a boatload of questions that need to be answered. If done properly, there shouldn't be much "profit" after expenses which include salaries are tabbed up at years end.

 

[Tomorrow]

Best to agree to a scheme ASAP, draft it up in writing, both of you sign it, and then live by it. Ideally you'll want to have this done before you start generating revenue, if that's possible.

BTW, will the business retain earnings and each of you collect a salary, or salary + bonus, or will you just split all the revenue without retaining any for the business? These are good points of discussion as well.

 

[n8236]

Sole Proprietorship, LLC, S Corp. or C Corp.?

It's a LLC.

 

[n8236]

Are you splitting expenses and overheads equally, regardless of who is doing what?

Expenses are split equally.

Exactly.

I was assuming that they may not be actually setting up a company but more starting a business together. If they expect to do $30-300k annually it may be easier to each have a sole proprietorship and collaborate by billing each other as contractors when needed. To give advice on profits there are a boatload of questions that need to be answered. If done properly, there shouldn't be much "profit" after expenses which include salaries are tabbed up at years end.

Ya, we're starting a company up together.

 

[jonbravo77]

First and foremost go find a good CPA. That person will then be able to advise you on what you should do with your company as far as overhead expenses and splitting the profit. You will need this person to help you set up the company ie: filing your articles of incorporation, getting a Federal TIN and a state TIN if you are going to be adding sales tax to any items you might provide clients. The CPA will also be able to maximize deductions. and help you with your business taxes when due.

Then you need to seek a business lawyer and have this person draw up contracts for you and your partner as far as profit sharing, what happens to the business if one person either drops out or something unfortunate happens such as death.

I know you are friends but if you both are serious about doing a business together you NEED to take the legal steps to ensure protection for both of you...

 

[Surely]

First and foremost go find a good CPA. That person will then be able to advise you on what you should do with your company as far as overhead expenses and splitting the profit. You will need this person to help you set up the company ie: filing your articles of incorporation, getting a Federal TIN and a state TIN if you are going to be adding sales tax to any items you might provide clients. The CPA will also be able to maximize deductions. and help you with your business taxes when due.

Then you need to seek a business lawyer and have this person draw up contracts for you and your partner as far as profit sharing, what happens to the business if one person either drops out or something unfortunate happens such as death.

I know you are friends but if you both are serious about doing a business together you NEED to take the legal steps to ensure protection for both of you...

All good advice. Protect yourselves with the right paperwork.

I am studying to become a CPA, and, even with my limited knowledge, I can't stress enough the importance of sorting everything out in the beginning. Especially when it involves a family member as a partner.

One thing....I believe that there is no need to file articles of incorporation, as a LLC is not a corporation but a form of partnership (although it shares some of the same characteristics as a corporation).

Wiki-wiki-wah.

 

[NC MacGuy]

Expenses are split equally.

Do you mean startup costs? Once a business starts writing checks, the company pays expenses. Keep track of EVERYTHING you buy and try to not buy anything until the company is actually paying for it. Start the company, put your money as a loan to the company and write checks from that. You'll also need to write up a loan agreement from the company to the owners. I made the mistake of using/giving a bunch of assets to my company and it's still a nightmare near 7 years later.

As far as fairness, you should probably work out a regular compensation plan and then a commission being percentage of revenue dollars from clients brought in by each of you. That way if you bring in 70% of the clients, you'll both get a predetermined paycheck but you will also get a nice commission making it a bit more equitable for the go-getter. I'm assuming that once a client has been obtained, you'll both be working towards meeting the contractual obligation to that client.

 

[c-Row]

Ignoring expenses for a moment... each of you gets one third of your monthly profit, no matter who did what. The last third could then be split according to the amount of work/clients each of you handled. In the end, the one who brought in more gets the higher reward, but it isn't really blown out of proportion this way.

 

[n8236]

That's some really good advise guys, thank you!

Yes, we're definitely taking our time w/ all this legal and profit stuff since it's so vital in protecting the both of us in the long-run if anything goes astray.

The situation is actually a bit more complex. Currently, I am in a pt job which I hope to find a ft soon. My cousin is currently unemployed and is also looking for a ft job. Given these circumstances, there's just no telling who might end up doing most of the work for our own company. We're slowly filling in the stuff for our contract and I'm pretty confident we'll have a solid profit/expense scheme.

 

[c-Row]

That's some really good advise guys, thank you!

So, let's talk about our consultant fee for a moment then...

 

[NC MacGuy]

So is this just fill in until you both get FT jobs or is it something you're going to stay with and it BE your full time jobs? If your just going to dabble and see how it works as a fill in, you may want to do a sole proprietorship. Especially if there's low exposure to risk since I had a much easier time getting liability insurance as a Sole. Prop.. Some companies will let you moonlight part time as long as there's not a conflict of interest so you could keep the sole proprietorship running even after getting a FT job. I had one while I worked a full time job to test the waters before quitting and jumping into my first S Corp. I'm on my second S Corp. now and it's not as easy as one would think.