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A partnership is one type of business structure that you might choose for your business. Typically, partnerships consist of two or more people who divide the income and losses of the business amongst themselves. The division of these profits and losses will ultimately be up to the partners to consider amongst themselves. All partiers will usually negotiate these details and include these terms within a partnership agreement. This agreement outlines all aspects of the partnership. To help you determine the best way to structure your partnership, this article explores five considerations when deciding partnership percentage for your business.

1. Control 

A key element of partnerships is the degree of control that partners can allocate amongst themselves. This is a primary consideration when deciding the partnership percentage of your business. Ultimately, the partnership agreement will determine the amount of control each partner has. 

For example, the partnership agreement might specify that each partner has one equal vote when deciding on matters. 

Alternatively, the partnership agreement might specify that voting rights will reflect each partners’ percentage in the business. If this is the case, you might include a provision in the partnership agreement that requires unanimous voting for specified matters. 

Essentially, when deciding the partnership percentage of your business, you will need to consider whether the percentage division will impact the amount of control each party has. 

2. Initial Investment 

When deciding partnership percentage for your business, the first thing to consider is who will be making the initial investment. No matter your business type, your business will need a substantial initial investment to get it off the ground. 

This initial investment might be financial. Indeed, your business cannot take off without funding. Likewise, whoever is funding the business in its early stages will usually have an additional stake in the partnership. 

However, investment in your business extends beyond finances. Therefore, when deciding the partnership division in your business, you may also want to consider whose initial idea the business was and put weight on who contributed to the initial development efforts.

Both money and time are valuable investments in a company, especially in the early stages. Therefore, you should consider both when determining what portion of the equity is fair in a business.

3. Individual Roles

You should consider partners’ roles and how critical these are to the business when determining equity portions. For example, the Chief Executive Officer (CEO) or Chief Information Officer (CIO) will generally receive a larger stake in a partnership than other partners.

In addition to considering the nature of each partner’s role, you should also weigh up the amount of time and effort required in these roles. This might include additional time investment as well as time spent in the future. For example, while a CEO has a critical role in a business, they might only work part-time and have less responsibility for the day to day management of the business. Therefore, you will need to reconsider their portion of the business equity.

4. Future of the business

The direction you intend to take your business may affect how you divide equity in your business. For example, consider you want to add a new partner to the business later on. Will founding partners have a greater share in the business than new partners, or will all partners have equal shares?

On the other hand, what happens if a partner wants to leave the business? In that case, do they retain their ownership of the company? Alternatively, do they have to sell their part of the business to other partners? Additionally, what happens in the instance that a partner dies? Is their share passed on or is it divided amongst partners?

5. Profit Allocation

It is important to consider that partnership percentage represents more than ownership. It also represents profit allocation. Unless otherwise specified in your partnership agreement, profits will be allocated proportionately to a partner’s ownership interest rather than in the form of a salary. This may impact how you decide to allocate the partnership percentage for your business. 

Further, it is common for those drawing a salary to receive less of a stake in the business. On the other hand, those who are not receiving a salary might receive a higher portion of stake in the business to compensate for their lack of salary. 

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Key Takeaways

Deciding on the division of partnership for your business is a crucial part of establishing your business. When deciding partnership percentage for your business, some key things you should consider are:

  • control over the business;
  • initial investment in the business;
  • individual roles in the business;
  • the future of the business; and
  • profit allocation.

If you need assistance deciding partnership percentage for your business, LegalVision’s experienced business lawyers can help. You can contact them on 1300 544 755 or by filling out the form on this page.

Frequently Asked Questions

What is a partnership?

A partnership is one type of business structure that you might choose that suits your business needs. Typically, partnerships consist of two or more people who divide the income and losses of the business amongst themselves. This also means that the division of profits and losses will be up to the partners to consider amongst themselves.

How do I determine partnership percentage for my business?

When determining partnership percentage for your business, there are a few things to consider. This includes considering who is initially investing in the business, the partners’ individual roles in the business, the future of the business and considerations for profit allocation.

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