On profit sharing
How the profits from a business should be divided among the investors.
By: Henry C. Ong | Jul 16, 2012 13:00 pm
Q: I'd like to ask what the standard profit sharing is for business investors. We are establishing a branch of our travel agency in a mall, for which we are getting two to three investors to put up at least P1 million of the needed capital.
A: The standard profit sharing is based on the capital that an investor has contributed to the business. For example, if the total capital of the business is P1 million and you contributed P350,000 of it, your share in the company's profits would be P350,000 ÷ P1,000,000 or 35 percent. Your company will then issue stock certificates indicating that you own 35 percent of it.
However, in the event that the company needs additional capital during the year and you are unable to contribute your proportionate share because you happen to be short of cash, your share in the profits would be reduced because your percentage share of the expanded capital would decrease.
For instance, if the total capital of the business is increased to P1,500,000 with all of the additional P500,000 coming from your partners and none from you, your share in the profits would go down from the original 35 percent to P350,000 ÷ P1,500,000 or 23 percent.
Of course, if you will be involved in managing the business apart from being one of its investors, you would also be entitled to a monthly salary, the amount of which needs to be approved by majority of the partners. Thus, when the company distributes to its investors the net income it earned during a particular year, your total earnings will be your proportionate share of its profits plus your salary package as one of its managers.
It is also possible for someone to be simply an industrial partner in a business. An industrial partner is one who does not put up any capital in the business; instead, he or she solely puts in time and effort to organize and manage the business. In such cases, the financial investors usually will give the industrial partner a certain share of ownership in the company, say 10 percent. This share of ownership then allows the industrial investor to a proportionate share of the company's annual profits. This is in addition to whatever salary the industrial investor is entitled to as a member of the company's management team.
Henry Ong, CMC, CMA, is president and COO of Business Sense (www.businesssense.com.ph ), a business advisory firm that provides expert solutions to small and medium sized companies. You may reach him at email@example.com.