Every business will experience a major change at some point. That means you and your partners should prepare for the likelihood of updating ownership shares and the way you split profits. We believe that every business should prepare for multiple scenarios when this type of change might be necessary. Below are four common situations we have seen with clients.
You or a Partner Decides to Go Full-Time with the Business
Maybe you started with the business part-time, splitting your time between there and the job you had with an employer. Now that the business is successful, you would like to resign from your other job and focus all your energy on expanding it even more. If the other partners don’t desire to work full-time for the company, it’s only right that your share of the profits increases with the time you commit to it.
When Qualifying for Business Funding Becomes an Issue
You may find that the business requires more start-up cash even though each partner has contributed as much as possible. When applying for a business loan at a bank or credit union, keep mind that it’s normal practice for the lender to consider the personal credit of each partner with a stake greater than 20 percent. They are typically looking for a credit score above 620 as well.
The partners may consider a change in ownership shares when not all of them have strong enough credit to procure a loan. It’s worth considering other alternatives since it isn’t always in your best interest to make this move. Invoice factoring, for example, is a way to obtain immediate cash without taking on more debt. You sell one or more unpaid invoices to a factoring company in exchange for the face value of the invoice less the company’s fee. This usually ranges from 10 to 30 percent.
When One Partner Has More Cash Available to Invest in the Business
When a business has been operating for a while and needs greater cash flow to keep it going, one partner may have the funds available to invest, while the others do not. In this case, the partner contributing the money would be right to expect a greater share of the company profits. As with all big changes, it’s essential to get this in writing before the partner contributes his or her personal funds.
You Currently Work Only for Ownership Shares
Perhaps your original contribution to the new company was your time or labor in exchange for a percentage of its ownership. Although you were never technically one of the owners, you can certainly ask for a change in the way it splits profits, if your time or labor substantially increases.
Work with Doerhoff & Associates CPA for Business Start-Up or Succession Planning
Whether you’re getting ready to start a business, sell a business, or find yourself somewhere in between, we can help. Please contact us today to learn more about our services or to request a consultation.