Discuss, Agree, and Document How Partners Will Be Paid

Many of the disputes I am called to handle are about partner’s compensation. Arguments over pay has destroyed many business partnerships. Sadly, those problems are avoidable.
Read this to learn how to avoid disputes over compensation…

Compensation Basics

This might surprise you. Compensation does not have to be equal in a 50-50 partnership. You can, in fact, do anything you want as long as it’s agreeable with your partner or partners. But, the important step is often overlooked. Be sure to write up and sign an agreement and include a clause that says you will revisit the issue of compensation periodically. More about that later in this post.

You probably though everything needed to be equal among partners. If there is no written agreement or established process for paying the partners, the default position is to divide everything equally. I’ve worked with partners who take that to an obsessive level. “You took $15 for gas on the debit card so I took $15 from petty cash.” Ugh. Really? Yes, really.

I always treat expense reimbursement as a separate issue from compensation. That’s for another post. But, I always recommend documenting how partners will treat expenses. Are there spending limits? Do you reimburse things like lunches? If a partner uses the debit card for gas, must all that gas be for business use? (I’ve seen partners run to the bank and fill up their car. Fair? It is if you agree!)

Start with a Conversation About Duties and Expectations

When you have “the talk” about money, start by getting clear on the duties and responsibilities of each partner. Once you agree on who is going to do what, you can talk about money. In a small business, partners will have to do whatever it takes to help the business succeed. So you don’t want to make the talk about duties to be too rigid. You want some degree of overlap. That’s the point of a partnership; you support each other. You want to balance the workloads to be fair.

Be careful about “perceived value” of work. When partners have to do everything at the business, it’s easy to argue over who does the more valuable work. If one partner makes all the sales and the other partner keeps the books and ships the orders, avoid the trap of saying things like, “without my sales this business would have closed a long time ago.” That might be true but every task matters to a young business and neither partner is more important. It is, however, very important to get the duties and expectations defined. Compensation issues will arise later. Once the business is making some money, salespeople can be hired. That’s when you’ll need to revise your responsibilities.

Position Vs. Production

One of the biggest problems I’ve seen comes over which position is more important or which position produces the money and how to split that money. I mentioned this above in terms of defining the duties of the partners. Now let’s see how this might impact compensation.

Let’s say that we have pure service business. We provide consulting to people who cannot decide where to go on vacation. We help them by explaining all the best places to go. Business is great! We both work very hard is the money is rolling in. We’ve hired a bookkeeper and office person which frees us both to focus on selling and delivering consultations. Last year, after expenses, we (the partners) split $100,000.

But this year is different. I’m a little bored with telling people about potential vacation spots. My house needs work so I’m taking a lot of time off to paint and do those projects that never get done. You (my business partner) love the work. You work longer days. You start working every Saturday. Business is booming and by the end of the year, we’ve got $245,000 to split after expenses. Great deal for me! I work less and make a lot more. You aren’t so happy about the arrangement.

Trouble is Brewing

You want a different arrangement for the split next year. Why would I agree? This works great for me. When you ask to discuss the subject, I decline. You demand a greater share of the profits, but I say no. You have the ethical high ground, but the law is on my side so far. How can we resolve this?

There is no easy way to fix a situation like that. Partners are required to split profit according to ownership if there is no agreement overriding that requirement. Many partnerships break when they hit this problem. What would happen in court? That’s a coin toss. A judge could order a new compensation agreement and instruct the partners to agree on a fair split. Or, the court could toss the case and tell the partners to go work it out or dissolve the business. Often the court will skip those steps and order the business closed. A partner might argue ‘excessive compensation’ or ‘unfair distribution’ but generally the courts stay out of squabbles and tell the parties to grow up and work it out. That court-ordered advice will cost you about $50,000 in legal fees and will take 3-5 years of your life. Worth it?

Who Is More Important?

The other end of the Position Vs. Production dispute goes like this. We are partners in a business we’ve been operating for 10 years. Business is great. We’re making a lot of money and we have 20 employees. I do all the administration and planning and you work sales along with our 5 sales professionals. We’ve always taken equal salaries and equally split the profits at the end of the year. But I’m not happy with this arrangement. I’m doing a lot of work and feel a ton of pressure. You are just 1 of 6 sales people. I really should be making more money because I have a lot more responsibility. What do you think?

Get It in Writing

The conversation about compensation needs to happen way before trouble breaks out. Think about the items I’ve pointed out above and anticipate future issues. If you’re in a business where the partners are producing revenue, consider a moderate base salary plus a commission on production. If one partner is doing work that deserves more pay, set up an agreement that makes that work. The key is to avoid the resentment that will come later if this difficult conversation doesn’t take place now.

When you draft your agreement, include the duties and responsibilities of each partner. Specify salaries and how commissions or bonuses will be paid. Be as specific as you can. Finally, you should specify a time to review the agreement. Each year? Once the company reaches revenue of $500,000 per year? It’s up to you. Remember, it’s legal to do anything the partners agree to. You’ll find it much easier to reach agreement before an argument breaks out. Be fair to your partner.

What If You Can’t Work It Out?

Call me. I can work with you and provide options you might not have considered. Having a professional, neutral third party guide the meeting will help it go a lot smoother.

Like this post? Please rate it! No information about you is collected and it won’t land you on a mailing list.  ~ Chris

“You demand a greater share of the profits, but your partner says no. You have the ethical high ground, but the law is on her side. How can we resolve this?”