How To Decide Partnership Percentage? (Detailed Insights!)

Partnership Percentage

Firstly, you need to organize a particular number of shares and then divide it equally among the partners. Take note that the shares entail the losses and profits of the company and also represent the owner. In business, having a partner most times turn out to be a very complicated situation although this depends on the kind of business and the kind of people you plan on making partners with. 

Not all business partnerships are complicated, and this is because there are ways to eradicate differences or misunderstandings amongst business partners. Although it is advisable to avoid partnership in businesses unless the kind of business you are about to venture into needs two people, or maybe you just need someone to back you up.

A business partnership is where two firms or two people agree legally to decide the future of a business, the details, and how it operates. Partnership deals differ between each company or firm, the deal is written and dictated by looking at the business operations. Certain things should be put down in the agreement, especially the profit percentage and how it should be shared, this article will be talking about the ways most people decide their partnership percentages. Here are some things to look at when dividing partnership percentage.

Partnership Contribution To The Business

Partnership Contribution To The Business

Of course, every business requires some money to startup, and if you are the sole owner, you would be the one taking all the costs, but when you have a partner, you both have to contribute to make the business a success.  Let’s say your business needs 100,000 Euros for the startup, when you are alone you have to bear the cost, let’s say you have one or three partners, you both would contribute 50k euros each. When it is four people, you all contribute an even 25k euros.

Sometimes one individual might not be able to provide that kind of cash, maybe you all agree he would be the person on the ground at all times, there has to be a written agreement because money and time are valuable.

What Does All The Business Partners Do To Help The Company Grow?

Business Partners Do To Help The Company Grow

Like we mentioned before, time and money are both very valuable, imagine if you and your partner both spend time on the ground to help the company grow. For instance, let’s say it is a two people partnership, and you both run a bakery. If one person runs the baking and production, the other person could be in charge of the finance. Don’t ever believe that because one person’s job might involve him or her getting dirty then he or she is working more than the other, both finance and production in this instance are tedious jobs. Another problem that comes up is finding out if everyone spends as much time as others do in the firm, it is just best to face your area in the business and be contented as long as the other person is playing his or her role well.

What Happens When One Partner Decides To Add Someone To The Partnership Deal?

This happens many times in several firms, the problem is that it always brings the issue of figuring out how much percentage is the new guy going to get. Honestly, this is a very difficult case, the only way to avoid getting problems like this is to include an instance concerning this problem in your business agreement from the onset. 

Imagine A Partner Wanting To Leave, What Can Be Done In This Situation?

There are a few things that could happen when a partner decides that he or she wants to pathways with the firm you all created. Putting that aside, the only two things that can be done in this instance are either the leaving partner sells off his share to the other partners or he or she keeps the share but has no right in the decision-making of the company. Buying a partner’s share isn’t simple though, you have to evaluate the company’s worth to know what you are buying, to achieve this you would need a professional. 

A Carefully Drafted Agreement Should Be A Priority From The Beginning 

This cannot be stretched enough, this is something every business should consider, a well-drafted agreement to avoid issues later on. This document should be very confidential and kept in order. This document should be drafted with a professional, not just you guys putting some things together, bring in a professional to help you consider situations for future problems. This is the main document for whatever firm you are starting, it should not be something you joke with, it might cost a lot of money but this document has to be well drafted because it will cost you and your partners more when issues arise in the future. 

The requirements for this document include the number of shares, ownership representation, and how the profits and losses are shared amongst everyone. Some other things are also added. After the drafting, everyone has to sign to agree with the company’s operations.

Tips that could help you agree on a good partnership percentage

Percentage Splitting

When splitting the percentage in a partnership agreement, everyone turns to what every partner is willing to put into the business. Partners may be on the same side and decide to put in cash contributions into the company so the company can have a successful starting especially when there are several things to buy. After the capital has been contributed, it is used to buy materials and pay for services, these are the things that contributions cover. Normally, the contributions whether monetized or through services, are what most firms use to share the percentage for each partner.

Profits And Losses – Splitting 

Partners can decide to Split their profit and losses making sure that it is placed with their percentage in the business. Sometimes, the percentage doesn’t matter, they all just split it equally and make sure everyone gets a share. These terms ought to be written down in the agreement because, with an agreement, conflict is reduced to a minimum and can be avoided too. Also, profit withdrawal should be placed on a particular date allowing everyone to know when to expect what they work for. 

How Long Do You Intend The Partnership To Last?

How Long Do You Intend The Partnership To Last?

Most firms or business deals today last for a long time, maybe forever. Sometimes they don’t but the owners might intend for it to last forever. Sometimes, the owners work towards a particular amount of years. This happens because they know how long the business which they are setting up is supposed to last, therefore the partnership gets to a point and dies out with the company. Sometimes, the company might not have to die for the partnership to be broken, maybe the agreement just puts the partnership for a particular amount of time, and then the decision of What happens next is written in the agreement too. The bottom line here is that the agreement must have a section drafted out for this purpose. 

Making Decisions And Solving Issues

Most times, this particular subject becomes a problem in a partnership deal, especially when issues like this were not written on the agreement. Making decisions and solving issues, two tough problems that should be taken care of from the onset, now it depends on what you all agree on, the best method for making a decision is by voting, over the years, it has proven to be the best policy. This is mostly gotten by a particular paragraph drafted in the agreement which helps to settle problems among partners without having to go to court. 

Authority

In a partnership system, authority becomes an issue, this firm is a combined effort so it is expected that the power cannot be allowed to one party. There is something called a binding power, to achieve this, you need the authority to be able to do this. Binding is where one partner decides that he or she wants to join forces or be in conjunction with something that could cost the company if it goes sideways. For this kind of authority, the agreement papers should have something to cover this aspect to draw in peace amongst partners.

The table below includes partnership agreements and what they entail. 

AgreementWhat It Entails
Profit-sharingThis is a section that must talk about how the money should be shared and when it should be shared
Partners contributionsA section that must put down every single penny and sweat that each partner brought into the business
DutiesNo one should go into any other person terrain, everyone should have his area of expertise 
Decision makingWho has a say on each matter? Every authority should be divided to favor each partner.

FAQs 

We’ve listed some frequently asked questions and answers about partnership percentage. 

What Is The Easiest Way To Calculate Partnership Percentage?

The best way is to work out a system where you figure out the number of shares and their worth so then you share among the partners. Every share is not just the profit gotten but also among the losses.

How Do You Make A 60/40 Partnership Work?

You and your partner would have to make sure you agree to share both losses and profits. Also, logically, the person with a smaller percentage won’t take many responsibilities. 

Closing Thoughts

Every partnership involves having to split some things, most times, the many people you have to split with, the more tedious it is. The problem most times is that most people don’t continue with the same energy they came in with, they just backslide and that is very annoying. Some people have had experiences like this so they now avoid partnerships deals based on this kind of problem. Splitting every percentage should first consider these things to make the business move swiftly. 

Last Updated on September 23, 2021 by Musa D

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