1. Establishing a Percentage of Business Ownership
2. Estimating the Value of Company Shares
3. Splitting the Company Profits
4. About Partnership Agreements

Updated November 26, 2020:

What percentage of businesses are partnerships? Currently, 80 percent of companies following a structured approach create successful business partnerships and strategic alliances.

Establishing a Percentage of Business Ownership

When establishing a partnership, you must outline and agree to the terms, details, and conditions that are likely to arise. This includes:

  • The percentage of each partner will own in the business.
  • What each partner's business responsibilities will be.
  • The steps that will be taken if one or more partners decide to end their relationship with the company.

To get the business started, the amount needed for the total investment must be calculated.

To figure your fair percentage of ownership, divide the amount you are contributing by the total estimated investment amount. Use this figure when negotiating with your proposed partners.

When meeting with other partners, discuss your proposed role within the company. Your role and your estimated work contribution may affect your percentage of ownership just as much as your financial contribution.

If the business is being set up as a corporate entity, establish a total number of shares that make up the worth of the business. For example, set 1,000 shares as being equal to 100 percent ownership. The number of shares would then be divided based on each owner's percentage of ownership.

Draw up an agreement that outlines all details of the business arrangement. The agreement should include the number of shares held by each person as well as each person's percentage of ownership.

You can find templates for partnership agreements available for free online. These can be tailored to your specific needs. It is recommended to have a contract attorney help draw up the agreement to ensure everything is in order.

Each partner should review the agreement, sign it in the presence of a notary, and keep a copy of the agreement for their records.

Depending on the state where the business is being registered, a copy of the agreement may be required for filing purposes with the Secretary of State's office or with the corporation bureau for the state.

Estimating the Value of Company Shares

You can use a company that offers valuation services to estimate the value of company shares. The company will assign a value to the business, which is then divided by the total number of shares. For example, a business with a value of $35,000 and 1,000 shares will have a share value of $35.

Putting an accurate value on a start-up business is almost impossible. When this is the case, it's best to discuss with your partners to decide on what each partner thinks is fair. The bottom line with a new business is that it's worth what you all agree on.

Once the partners have decided on the value and ownership structure, the next goal is finding ways to make the company successful.

Splitting the Company Profits

The way the company profits from a business partnership are split is at the discretion of the company as long as each partner agrees. Consider the following when determining how to divide the profits:

  • Profits can be split equally among partners or each partner can receive a base salary with any remaining profits being split equally. If the partnership is a 50-50 agreement, both partners must agree about how the profits are divided. If it is not an equal partnership, one partner has the final authority in deciding profit splits.
  • If one partner or most of the partners plan to have a less active role in the business, the agreement may be to pay the more active partner a higher salary.
  • Another alternative is paying each partner a pre-agreed upon rate for work completed or performed.
  • Include a profit-sharing agreement as part of the partnership agreement regardless of which profit payout method is used.

About Partnership Agreements

When setting up a partnership agreement, there are four things you want to be sure are included: the division of profits, which also includes the losses; each partner's contributions to the partnership; the role each partner has in decision making; and each partner's management duties.

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