Does Partner Compensation Always Have to Be Equal?
“I do a lot more work than my Business Partner but we both take the same amount in salary. That’s not fair but my partner says our pay has to be the same because we are 50/50 partners. Is that true?”
Chris Reich provides business partnership advice.
Compensation in an Equal Partnership
When talking about compensation in a business partnership, there are two pieces to consider: salary or commission and distribution of profits.
Let’s start with distribution of profits. Generally, unless there is a written agreement otherwise, profits are divided according to the percentage of ownership. That means that 50/50 partners split the profits 50/50. It is possible to have an agreement that specifies a different formula as long as you have a signed agreement. That agreement should state the reason you are changing the default split. For example, you might have put up all the money to get the business started. We both work the same hours but we agree that I get 60% of the profits to your 40%. That’s fine, and we’ve stated a reason for the split.
Pay, Salary, Commission, and Bonus
Money from the business other than profit distribution, is up to the partners. It’s still a good idea to document how partners will receive money, but there are fewer legal issues around this type of pay.
Of course, if partners are treated as employees, their pay reduces profits and will reduce the K-1 distributions. However, it is perfectly acceptable for partners to have different salaries.
Always Get Agreements When Money Is Discussed
Whenever there is an agreement about money, it’s wise to document it. Your agreement should include the terms of any financial arrangement. State amounts, what needs to be done to qualify for the payments, and include how long the agreement is to be in place.
For example: In addition to the partner’s salary of $2,000 per month, Chris will receive an additional $500 per month for maintaining the company’s marketing including all social media accounts. It is expected that the business will see 10% year over year growth as a result of Chris’ marketing efforts. This agreement will be in place until March 1, 2022. [All partners should sign]
Avoid Open-Ended Agreements
Avoid agreements that say “Chris will receive $500 to maintain the company’s marketing.” If Chris slacks off, it won’t be easy to stop making those payments. Always set a term or set a clear standard. For example, you can set an end date or say that sales must increase by 3% per month or the agreement ends.
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