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Q: Starting a business with multiple investors ( Answered 5 out of 5 stars,   0 Comments )
Subject: Starting a business with multiple investors
Category: Business and Money > Small Businesses
Asked by: joebobcat-ga
List Price: $10.00
Posted: 19 Dec 2005 10:52 PST
Expires: 18 Jan 2006 10:52 PST
Question ID: 607491
If I were to start a business with multiple investors, and most of
them were not active in day to day operations, how does the ROI work??
I would be the owner/operator and not necessarily the largest
investor, so would I pay myself a salary? Would the operating income
or profit be payed back to the investors based on what the percentage
of their intitial investment?

I would be happy with any links to where I could educate myself on
this process. I know what makes sense to me, but who would I consult
to know for sure?

I am thinking that any investor not involved in the day to day
operations would be payed a certain amount of the overall profits not
earmarked to be invested back into the company. I'm sure there would
be alot of lawyers involved in this process.
Subject: Re: Starting a business with multiple investors
Answered By: taxmama-ga on 22 Dec 2005 04:45 PST
Rated:5 out of 5 stars
Dear Joe, 

You have the right idea. 

If you're doing all the work, you ought to get paid
for your time, before sharing the income with investors.

Don't worry, it will make sense to them, too. 
After all, if they invest their money, they want the business 
too succeed. It won't, if you can't afford to work there.

So, first, you'll need to select a business structure -
either a partnership, or an LLC, or a corporation, or an S-corporation.
The folks at Nolo Press have some articles about the structures - 
and they have some good books on how to form these entities yourself.

Of course, it really helps if you have a good tax professional 
in your corner to help you understand the tax effects of your
attorney's recommendations. And if you have investors, it's wise
to have an attorney to protect your interests.

OK, so how do you get paid?

Absolutely, DO build in reasonable compensation for yourself.

If your entity is a partnership  or an LLC that files as a partnership,
you can't have a salary. You get what's called a guaranteed payment.
That can either be a fixed monthly amount, or a percentage of sales.
All you have to do is to define it. In fact, you can even have the
company pay your benefits - like medical, sick time, vacation time.
Just spell it out in the agreement with the partners or members 
(if it's an LLC).

If you create a corporation, you must have an actually salary,
with payroll witholdhing and everything. You can have the company
pay for your benefits and deduct them. 

With an s-corporation, the company may not pay for your benefits
if you own 5% or more of the shares. If the company pays for them, 
you'll have to add the cost to your own payroll.

So that's how you'll get paid.

In all cases, your investors will get paid their share of the profits
after your compensation - and perhaps even after you keep a reserve
for next year's operations or growth. You can spell that in the agreement.

Remember, be sure you are being paid enough so that you don't have 
to struggle. Otherwise, you will be distracted, looking for outside
work, or so frustrated that you do poorly. 

Read more information in the Nolo books and on their site before you
talk to any professionals. It will help you have more control of your
situation and to arrange the best deal - for everyone concerned.

Good luck in your new business.

Best wishes,

Your TaxMama-ga
joebobcat-ga rated this answer:5 out of 5 stars and gave an additional tip of: $5.00
Great answer! I appreciate the time.

There are no comments at this time.

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