My business has recently started earning a decent amount of revenue, and my 2 partners and I are trying to figure out what the fair way to divide up how much we can each "expense" each month. Our equity is split like this: Partner 1: 50% Partner 2: 30% Partner 3: 20% All partners work full time in the business and take the same salary, yet our investments into the company have been different. Some have suggested we take our total amount we have available for expenses and split along the equity amounts. So, Partner 1 could spend more of the company's expense account (ie. nicer car, etc). What do you guys think? What's the best way to do this?

I'm going to answer you with my own experience. The way you mentioned to divide the expenses makes total sense and it's consider the "rational" thing to do. I have seen it work many times and it's what many would consider "fair".
The problem (and this is counterintuitive) is that we are humans with emotions and we can't separate us from them.
Once someone starts buying nicer things the "ego" hits in, also the "jealousy" and the competitive nature. This brings bad culture and a worst environment. I know you think "we are different", "it won't happen to us" but it actually does and it's not your fault, it's just our nature.

My solution is the following. Treat the company as a separate entity from the three of you. So the company (not you) have revenue and costs. THE company can have expenses and they should be as little as possible to run efficient and lean. THE company has to create the most profits as long as it's in the same direction of creating value for their clients.

Now, because the company has shareholders (you guys/gals) the profits it generates will go into your pockets 50/30/20. This is after your salaries, that depends on your place in the company and that is money totally entitled to each of you. The profits can be expended as whatever you want because it's like part of your salaries.
You will think this makes no sense due that is just a "technical" step. But it's important to separate you from your company. Keep personal and professional in each side of the table.

Hope this helped :) If you want to reach out I would be happy to talk. I have helped many family companies to also deal with this kind of issues.
Have a great day

Answered 8 years ago

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