Forming a partnership is a smart way to split the responsibility of a business. Initially, it may seem like you and your partner agree about all important business factors and how to operate your new venture.
However, as time passes, conflict can arise. To help reduce the potential of expensive business litigation, it’s important to outline the terms of your partnership, including profit sharing, in your partnership agreement. Popular options for profit-sharing in a partnership are outlined here.
Division by responsibility
You can choose to divide profits based on responsibility. For example, if one partner is responsible for day-to-day operations, that partner may receive 70% of the profits due to their high level of responsibility. You can split the profits based on your situation, but outlining this in the agreement will reduce disagreements related to profits in the future.
Division by capital investment
It’s also possible to divide profits based on the capital investment made by each partner. For example, if one partner contributes more to the initial business formation, they may base the profit split on this. The partner with the most capital contribution would obviously receive the highest percentage of profits.
Profit sharing can also be based on an arbitrary number. The key is that both partners agree to it. By agreeing to this split in the early days of the partnership, it will be easier to avoid disagreements in the future.
Protecting your partnership
Forming a partnership offers many benefits. Putting everything in writing in your partnership agreement is also highly recommended. You can use the agreement to settle the dispute if a conflict arises. You also have the option of legal action if needed. Knowing your rights will help you protect your partnership and business.