Must You Pay a Salary to a Business Partner?

Agreeing on compensation is key to a harmonious business partnership.

Agreeing on compensation is key to a harmonious business partnership.

Business partners aren’t employees. You’re not obligated to pay a salary to a co-owner of your business. Business partners share the risks, profits and losses of a business. At the same time, business partners still want to make money for their work and investment. So, how your small business compensates you and your partners is a matter of negotiation and agreement.

Making Dollars and Sense

A well-researched and written agreement approved by a lawyer reduces the chance of headaches and heartbreak as a business partnership unfolds. This is especially essential if you’re going into business with a spouse, parent or best friend. It may seem easy for partners to just shake hands on a 50-50 split of profits. Problems arise, though, if one partner starts feeling that her work and results are worth more than the other’s. From the start, writing out how each other’s work will be valued and monetized can prevent doubt about what’s fair.

Silent But Golden

If you register your business with your secretary of state’s office, you can take in limited, or “silent,” partners who put money into your company without taking any management positions within the company itself. Silent partners share in the company’s profits and tax benefits, as well as its losses. Essentially, you run the business, and your limited partner provides capital. Still, even if this silent investor is your rich uncle, an agreement needs to be written and fully understood, including terms regarding a repayment schedule, fees the investor is expecting or any percentage of business ownership the investor will have after the initial investment is recouped.

Making Partnerships Count

General partners with active roles in your business can be paid in a number of ways. You can agree to allow advances to be drawn against their year-end share of profits or agree on a commission they make with every sale, suggests Karen E. Klein in her Bloomberg Businessweek article entitled “Fix a Strained Business Partnership Now.” Many business owners and general partners forego compensation as their startups get a foothold, writes Caron Beesley in an article for the Small Business Administration. While partners can hold different percentages of ownership, and eventually get paid salaries as a percentage of profit, most businesses limit the total of salary percentages to 50 percent of profit, according to Beesley. This leaves profit in the bank to feed business growth.

Lowering the Curtain

While you’re likely planning for a partnership that thrives for many years, every partner still needs an exit plan. Decisions on how an exiting partner gets paid, how assets will be divided, any responsibilities the exiting partner has upon leaving and what happens to the business when someone leaves should be figured out at the start of the partnership. Overall, the key to compensating yourself and your business partners is agreeing to adapt to your business’ cash flow and planning for long-term business growth.

 

About the Author

A writer since 1995, Christian Fisher is an author specializing in personal empowerment and professional success. From 2000 to 2005, he wrote true stories of human triumph for "Woman's World" magazine. Since 2004, he has also helped launch businesses including a music licensing company and a music school.

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