Deciding partner compensation when starting up a company is critical. Without a fair and just written compensation provision in a partnership agreement, the business can implode. Here are 4 things you should think about when deciding how partners should be compensated:
- When will profits be divided? Will it be once a year, at the end of the year or will partners be able to draw their profits at some earlier point?
- Should a partner receive a additional salary? In the case where one person may work more hours than the other partners, it is advisable to either pay an additional salary or provide a larger portion of the profits.
- Should profits and losses be shared equally?
- Should a certain percentage of the profits be re-invested in the company? For example, it may be important to retain some of the profits to provide a bonus to keep a key employee.
It is vital that you and your partners how decide profits should be shared as early as possible. A lawyer can help you focus on what is important and select solutions. But ultimately, it is up to you to decide how profits are allocated.