Partners Profit distributions 10

[driftLimiter]

I am planning to have my own structural firm in the coming years. I want to have a partner with me and I don't know yet how I want to structure the % of profit distributed between us.

I know there's no golden ticket answer, but I am curious if anyone else in similar situations could elaborate how they distribute the profits.

I want to try to have a system that stays fair and works for both of us. But I have SE license and he doesn't, given that we work on large buildings, it seems like a situation could arise where I am stamping most of the work.

Just looking for ideas, thanks in advance - DL

 

[SWComposites]

you definitely need a discussion with a potential partner up front; this can lead to misunderstandings and problems if not clear and agreed.

maybe divide profits by a percent of [total hours (billable + admin/marketing) * hourly rate] for the year? assuming you would bill at a higher rate as an SE. (?)

 

[phamENG]

Generally it's a matter of initial contribution - how much start up capital do you need (licenses, office lease for the first year, furnishings, operating capital for twice as long you expect to need to float the operation before generating cash flow, etc.)? How much will each of you be contributing? Profits are typically split along those lines - doing otherwise can have tax implications you should discuss with your CPA.

If you're somehow taking on more personal liability through the use of your seal, I'd suggest factoring that into your W-2 compensation, either through salary directly or through a bonus structure you and your partner agree to. That way it comes out before the profits are split and keeps the books and calculations cleaner.

Of course, that liability can be mitigated and the need for increased compensation reduced. But that's territory for your lawyer.

 

[271828]

A major factor should be who brings in and manages the most work. For example, if one of you develops client contacts much more effectively, he or she might end up bringing in and managing the vast majority of the fees. The other's role might look a lot more like "senior engineer" than a real partner. I've seen this happen before. I can't imagine nearly equal pay sitting well for long in such a scenario.

 

[glass99]

Re: the stamp, your partner will need to have at least a PE in order to be an owner of a professional services firm. This is a requirement in my state at least.

 

[JAE]

Agree with phamENG that most firms use the percent of initial capital brought in to the firm as the basis of profit sharing going forward.
The percent ownership can always be changed in the future (buy-sell shares) as the individuals needs, value, and opportunities arise.

glass99 - I think most states don't have that requirement but you're correct that some do.

 

[NorthCivil]

Call me old school. If i was going into a partnership, especially with another engineer, i would want it to be 50/50.

If you don't think this person will be an equal contributor, why would you go into business with them? keep looking for a more suitable partner.

If your potential partner is not yet licensed, surely there must be some quality in them that you think is partner-ship worthy? a license isnt everything. what do they bring to the table that you don't?

That being said, i looked and looked and here i am still a sole-proprietor. I'm glad i turned down every "opportunity" that came my way through the years though.

 

[CWB1]

Agreed with pham. Businesses typically account for investment and income separately. As owner, you invested dollars, assets, or hours to own a specific percentage of the company. That percentage is how profits are divided regardless if you're a silent or active partner. If you also work for the company as an active parter/employee, you should also receive a regular paycheck.

Also agree with NorthCivil in that I wouldn't associate the quantity of prints stamped with either risk or effort.

 

[glass99]

Re: investment in the firm. I imagine the hard cost investment in the firm would be small if you are not hiring staff or getting an office. You are just getting some software and insurance really. The big thing you need to finance is your accounts receivable, and the way that works is the partners get paid when the money comes in. The real investment is in partners effectively not getting paid for 3-6months.

 

[LittleInch]

CWB1 raises the key point here, which is how are you planning on creating profit? How much of the payments it are direct salary or payments to the individual and how is that going to be divided? Fixed salary each? Hourly paid but with different rates? Bonuses?

Like most people I think the ownership depends on capital employed in the business and hence profits split accordingly.

Is profit 10% of turnover or 50%?? Makes a big difference.

Remember - More details = better answers
Also: If you get a response it's polite to respond to it.

 

[StrucPatholgst]

I grew to hate having partners. We viciously resented each other. It all had to do with the effort that was contributed by each equal partner. We based compensation and profit sharing on capital contribution originally. But, oh mother of god, that became a bone of contention when it slowly morphed into one partner doing the lion's share of the work. Thank god that was a long time ago. I still to this day don't speak with any of them. They're all out of the engineering field entirely.

 

[driftLimiter]

Thanks for all the great input so far. I am here to brainstorm and come up with a reasonable plan. I'm open to more discussion but I don't have concrete answers for much of the lines of questions above. This is an emerging opportunity for me and I'm in the early phases of thinking it through.

I tend to lean towards the simple answer 50/50 but I'm trying to see if I can develop a system that intentionally tries to avoid a situation like what StructPathologist has described.

 

[TigerGuy]

I once heard that a 2-person partnership will never work. That's why you need to find a 3rd sucker, er partner, to join the venture. Their words, not mine.

 

[glass99]

Law firm partners get paid on an eat-what-you-kill model. If you bring in a job and execute it you get the income from it minus an allowance for overhead. It neatly resolves the lazy partner problem, though can create friction where partners are collaborating on either the sale and execution.

I once heard that a 2-person partnership will never work.

Oy vey. I think there is some truth in that. Having a senior partner and a junior partner achieves the same result, but there needs to be a reason for the split in equity like the junior partner having joined the practice some years after the practice is established.

 

[JAE]

My son is an architect and is in a 50-50 partnership with another architect. They have 10 employees and have been doing fine for almost 10 years.
It depends on the personalities and goals of each, although sometimes you don't always know up front how you will truly interact day-to-day and year-to-year.

On the other hand, I used to work for a firm that had two partners.
One was a clean cut, non-drinker, family-man, religious and ethical engineer.
The other was a hard drinker, smoker, cusser, etc.
Somehow they got along for many years but the staff was very divided in allegiance between the two.
Made for intense and interesting politics inside the firm, which isn't a good thing.

 

[MTNClimber]

I believe a true partner should be 50/50, assuming they will pull their weight. As others have mentioned, the weight may not be specifically technical. This is even truer if you want to scale, which quickly multiplies the business administration, marketing, recruiting, and other various efforts.

If you doubt they will be able to help out enough to be considered a 50/50 partner, you may want to work something else out to avoid resentment and straining the relationship. Different base salaries + bonus/profit distribution may be a route, but then the other person may build resentment out of that.

Good luck! I wouldn't go into business with someone that I wouldn't want to marry.

 

[Aesur]

Profit sharing should be based on ownership percentages, and as a pass through company, you will be likely be taxed as such. Ownership percentages should be based on negotiations/discussions about what you bring to the company in the form of capital for startup and sweat equity. Salaries should be set on market rate for the position/roles you hold and or your roles, ie, maybe one of you is more a PM/engineer and the other is the guy who goes and gets projects and does most of the marketing. A piece of advice I would offer is, the more you can make as profit sharing versus salary, the less taxes that are paid, keep that in mind while setting salaries, but also consider that you should make market rate salary to avoid the conflict of appearing to try to cheat taxes.

 

[Enhineyero]

Great discussion here.

Do you even want to have a partner?

Is there a right and wrong reason to get a partner? Interested in what others have to say.

Im a sole practitioner, was thinking of starting my business with a partner - never found the right fit and went on my own. Now, I got enough work for at least 2 to 3 people - no partner still. Gave a chance to some but they just fell short in many things, mostly non-engineering stuff like managing their own time/jobs, marketing/networking, and most of all the lack of drive (did not see the will/desire to make things a success from any of them, I realised working for yourself is not for everyone). Any advice on where is a good place to look for a partner?

 

[glass99]

I think the PRO reasons to have partners are:
- Different skills let you cover more ground. We do a lot of facades and special structures, so it would make sense for me to partner with a primary structures guy. It might make sense for a more business/sales oriented person to let a more technical person focus on the engineering. My father's precast concrete business had between 3 and 7 partners at various times with this specialization thing in mind, and it worked well (though they definitely had arguments).
- You immediately scale to a larger and more stable firm. When I first started one of my clients urged me to join forces with another guys who was starting around the same time so he would feel more comfortable giving us bigger jobs. There is a sense that if the one key guy gets "hit by a bus" the client is screwed.
- Someone to talk to: it can be a lonely thing to have to make all these decisions and not be able to talk to anyone who actually understands what the hell you are talking about. How much is a reasonable fee for this project? Should this client be trusted? How would you solve this detail?

 

[Sparweb]

Most business owners act as both owners and employees in the same person, and they do a lot of work on behalf of the company. I see two frames of thinking and action for these small business owners, whether they have a partner or solo.

The first frame is the ownership, based on investment of capital and other assets, which expects a return. In a partnership, the value of your equity is determined by the share of the profits you're entitled to. The second frame is the work, which owners do based on their various skills and time available to sustain their company. Work is compensated by salary, however, not profit.

Getting these two frames mixed up leads to conflict, but it's easy to do. You're one and the same person, after all. It's hard to tell when you are making a decision as an owner or an employee or both. Trouble can arise between partners, if they believe work earns them entitlement to a greater share profit. Working more hours doesn't automatically earn you a bigger share of the profit, because hours are worked by employees, not owners. That doesn't mean that partners can't make an explicit agreement to do that anyway, but I think it would take a rigorous agreement. This leads me to feel like NorthCivil does. I'd only be comfortable with an even split among partnership equity. If there's a difference between skill and credentials, that can be resolved at the work hours/salary level, which I'd expect each partner to be collecting, too.

About 10 years ago, a friend of mine joined a partnership as a junior partner with only about 30% equity in the company. There was a written agreement between the two partners that his compensation would increase his equity every year until it reached 50%. That didn't stop the majority partner from ignoring the deal and using lawyers to deflect and defer the execution of that agreement. Eventually my friend gave up fighting that battle and forced the majority partner to choose either settling the equity or folding the company. The majority partner let it fold, which is what my friend wanted - he'd had enough and just wanted to get out.