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Employment and Partnerships

August 27, 2006

Q- My married son and daughter along with their spouses are seriously contemplating buying an established business. They will need to get some kind of loan. Here is the question – in this particular partnership situation, one couple will completely run the day-to-day business operations and will each draw a salary. The other couple will be a “silent partner” and only participate in the major or substantial decisions of the business. If one couple actively runs the business for a salary, how does the distribution of profits work? At the end of the year after all expenses have been paid, is the remaining profit split 50/50? If that is the case, is that fair to the working couple? How would securing the loan be done if there are two couples?

You are correct that distributing the profit on a 50/50 arrangement is not fair at all if one couple is working in the business and draws no salary. With each and every business there needs to be a clear separation between ownership and management. When these two functions get intermingled, the business is sure to fall apart very quickly.

The couples who works in the business should draw a fair salary that is deducted from expenses before any dividends are paid. If the couple were not working in the business the partners would have to hire someone to manage the business and pay them a fair salary. Once a salary is paid to the couple then the distribution of profits can be made equally to the two partner groups.

This concept of separation recognizes that ownership and management are really two separate functions and need to be rewarded separately. This separation is so important especially if the couple running the business does not do or cannot do a good job. If this does happen, then they can be removed without changing the ownership composition.

When making a loan to a small business, the financial institution is going to demand that a personal guarantee on the loan from both couples, no matter what type of organization they have. A personal guarantee is a document stating that if the business cannot pay the amount of the loan, the two couples will become personally liable. Additionally, if one couple cannot pay, the financial institution will look to the partner to pay off the entire loan.

A partnership with a brother and sister is always tricky because so many siblings view their brother or sister as a competitor and not a cooperator. My sister and I just would not do well working together at all. Also, the spouses of your children are going to play a huge role in the success of this business. Starting a business is always tough and having siblings as co-owners often increases the probability of failure.

There are many issues to work out in starting a new business and I encourage you to resolve all of these issues before you move forward.