A partnership contains two or more people who share the income and losses of the business. The ownership structure is up to the partners to negotiate and include these terms in the partnership deed/agreement. A partnership deed is the most important agreement for persons in a partnership business. This article will help you evaluate and think over some of the aspects of the partnerships that will help you determine how you will allocate ownership.
When calculating the partnership percentage ownership, one must consider some factors such as;
- Determining the initial investment.
It’s only sometimes that partners contribute equally at the start. Whoever makes the initial capital investment and funds the business in its initial stages should have a more significant stake in the partnership.
Another way is to determine the investment required to start the business and divide your contribution by the total to estimate a fair percentage of ownership.
Investment usually extends beyond finances. Consider where the initial idea of starting the business was and put more weight on whoever contributed to the initial development efforts, the development of the IP, the time spent setting up the business, and business development. At an early stage, time is valuable; therefore, sweat equity should account for and weigh how to allocate ownership.
- Consider individual roles and responsibilities.
Each partner brings something to the table through skills and expertise. If a partner has a specific skill needed in the business, this gives more reason to provide a more significant percentage to the said partner.
The level of work and commitment each partner is willing to put out will affect the percentage of partnership. If one partner is willing to put in more hours and responsibilities, they could ask for a higher stake in the partnership.
Also, weigh the time and effort required in specific roles, including additional time investment and time spent later in the business. Some will have critical roles in the company but work fewer hours, while others will invest more time in the business in day-to-day operations.
- Consider control
Control is usually a big issue for entrepreneurs. Control is determined by voting rights which could reflect each partner’s percentage in the business or could reflect who knows the company the best.
Some partnerships have veto rights to a significant owner on decisions such as selling or buying assets, taking a loan of specific amounts, selling the business, and admitting new partners.
If a partner is going to manage the business and another does the actual work, the manager would get a higher percentage because he has more experience in management than the other. Still, in some instances, it could be the reverse.
- Think of the future of the business
It is essential to determine whether a partner is in the business long-term. If they are not, they may have a smaller stake in the partnership percentage to avoid the other partner being unable to buy them out when the partner leaves.
Also, consider what happens when there are new partners in the business, do the initial partners get higher percentages than the new partners?
What if they leave? Do they still have a percentage share of the business? And if they die, do the other partners divide their share among themselves, or do they pass it down to their successors?
- The allocation of profit
It is important to note that the partnership percentage represents more than ownership. It also represents the allocation of profit. Partners are allocated profit proportionally to a partner’s ownership interest instead of in the form of salary unless the agreement states differently.
Partners who get a salary have a lower stake in the business, and those without a salary have a higher stake to compensate for the lack of salary.
When determining partnership percentage, always consider who initially invested, the partners’ roles, the business’s future, and how they will allocate profit.
Splitting ownership between two or more partners can be difficult sometimes, and it’s hard to know from the beginning how much effort each person will put in to predict a truly fair split in ownership and profits. Splitting based on initial investment is clear-cut but can only guarantee fairness in the short term. Over time, things change, partners should set up ground rules and make a detailed partnership agreement to ensure proper communication and conflict resolution.
If you need help determining your business partnership ownership structure or drafting your partnership agreement/ partnership deed, book a call with Gracen Advocates business lawyers at +254748223255 or email us at counsel@gracen.co.ke to discuss your partnership needs.