Profit and Operating Agreement Question

2 Replies

Hello all! I'm Tom Kidd and live in SW Ohio. I'm an attorney, more of a litigator than a transactional guy, but interested in becoming more of the latter as I get old and want to stop fighting with all those young turks.

Anyway, my question is I am looking to form an entity with a close friend. I will be bringing more money to the table. He will be bringing more construction/repair knowledge. Typically, I would base the profit distribution on the initial capital contribution, but I am not sure if that is equitable in this situation as his skills will likely be needed more often than my skills as an attorney. Thoughts on how to determine a just allocation in this situation? All suggestions are appreciated.

Partnership operating agreements are very flexible.

You could do a waterfall schedule for both allocation of income and capital distributions.

e.g.

1) You're allocated a cumulative fixed annual return on your unrecovered capital contribution (6%, 8%, 10%, you name it)

2) Profit in excess of the fixed annual percentage return is split 50/50.

Capital distributions could be something like: first distributions are to recover your capital contribution(s), then preferred return accrued to you, and finally the 50/50 profits.

Food for thought.  Good for a conference call with your tax CPA/EA and your attorney.

Seems like you'll be flipping.  Keep in mind allocation of income and distributions must be made prorata according to equity ownership if an S election is made....otherwise you bust the S Corp and revert to C Corp.