How do business partners get to set the Profit Sharing Ratio?
If both partners are actively working in the business then it is usually split in direct proportion to the amount of ownership by each person. If the business required $200,000 in start up capital and one person put up $150K and the other $50K then it would be a 75%/25% split. However, if the person who put up the $150K is a “silent partner” meaning that they don’t work at the business and don’t have any active participation in the operation then their profit % could be very low (e.g. 10%, etc.). There are many other factors that can impact this such as if a particular partner has a special skill that is vital to the business and the other partner has a generic skill. A plastic surgeon opens an office but needs additional financing which is provided by a partner who will just manage the office and staff. Even though the surgeon only puts up 25% of the start up capital, he could still get 50% of the profit since it is his skill that is driving the revenue. Bottom line, it is something t
