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How are minority owners in a partnership compensated?
Posted on 3/25/15 at 11:57 am
Posted on 3/25/15 at 11:57 am
In a simple partnership business arrangement, how are minority partners protected from the control given to a majority owner....especially if they are "silent" partners providing some initial capital investment? If the majority owner owns 51% and is the primary employee....for example a programmer building an app but needs money from an investor for marketing of the app, don't they possess the ability to decide their own salary and whether or not to issue dividends? Are there typical compensation arrangements that guarantee compensation for the minority owner?
I'm thinking of the sharks on Shark Tank...most of the time they ask for a minority stake in the company.
I'm thinking of the sharks on Shark Tank...most of the time they ask for a minority stake in the company.
2
Posted on 3/25/15 at 12:37 pm to rotrain
I'm a little confused by the way you worded your question, but minority owners generally get a share of the income or loss allocation and they also can get distributions.
The neat thing about a partnership is that it is very flexible in determining how to handle these things. The Shark Tank people generally may only ask for a minority interest, but I'm guessing they want some preferences.
The neat thing about a partnership is that it is very flexible in determining how to handle these things. The Shark Tank people generally may only ask for a minority interest, but I'm guessing they want some preferences.
Posted on 3/25/15 at 12:43 pm to LSUFanHouston
Cash distributions...
Posted on 3/25/15 at 12:49 pm to LSUFanHouston
But what requires the majority owners to pay out part of the profits (or loss), especially if the majority owner is also a paid employee who can set his own salary(ies), thus receiving a greater portion of the profits that otherwise would have been paid out in dividends?
Posted on 3/25/15 at 12:57 pm to rotrain
Their are operating agreements with the partners/stakeholders created which would have these terms implicitly stated
Posted on 3/25/15 at 1:01 pm to rotrain
Members of a partnership aren't typically compensated via salary. Why wouldn't they just adjust the percentage if one should be getting more?
There can be guaranteed payments to partners, which would come out before income/loss allocation. But I still think the person getting guaranteed payments would likely be asked to take a smaller equity percentage?
There can be guaranteed payments to partners, which would come out before income/loss allocation. But I still think the person getting guaranteed payments would likely be asked to take a smaller equity percentage?
Posted on 3/25/15 at 1:01 pm to rotrain
Ask Eduardo Saverin about this if you get a chance.
Hint: Have your attorney read everything you sign.
Hint: Have your attorney read everything you sign.
Posted on 3/25/15 at 1:04 pm to southernelite
a partership formed as an llc is more flexible in these regards than that formed as a s-corp.
s-corp would have to distribute according directly to equity percentage where as a partnership is flexible and nearly any terms can be drawn up
s-corp would have to distribute according directly to equity percentage where as a partnership is flexible and nearly any terms can be drawn up
Posted on 3/25/15 at 1:09 pm to DirtyMikeandtheBoys
quote:
Eduardo Saverin
Eskimo brother
Posted on 3/25/15 at 2:18 pm to rotrain
quote:
But what requires the majority owners to pay out part of the profits (or loss), especially if the majority owner is also a paid employee who can set his own salary(ies), thus receiving a greater portion of the profits that otherwise would have been paid out in dividends?
This is why you should always hire a good business attorney to draft partnership agreements as well as anytime someone gets in or out of a partnership.
The benefit of being a "silent" partner is not having to pay self-employment tax on the income allocation. The negative is that you can't call for cash distributions to be made. Need to figure out what is important.
Posted on 3/26/15 at 3:29 pm to deNYEd
What are some examples of "these terms" that could work to protect a minority owner? Are there certain strategies that are commonly used by minority partners in operating agreements, for example taking a gross percentage instead of net?
Thanks for all of the help thus far.
Thanks for all of the help thus far.
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