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    2 Replies Latest reply on Apr 21, 2011 8:37 AM by sammythesm

    Profit Sharing Plan for Startup

    sammythesm Wayfarer

      Hi Everyone,


      I have a small LLC that is self sufficient and profitable, but which doesn't generate large revenues.  As such, I can't pay our two partners/contractors wages, so I offer annual profit sharing as the compensation for their work while we build the business.


      My question is: how can I structure the profit sharing plan to where it gives us flexibility to add and subtract people from the plan during the year?  For now, I just had my two partners sign an agreement that stipulated they would recieve a 33% share of profit for the fiscal year.  The down side to this is that as we add or subtract people, I have to get everyone to sign a new agreement with a new percentage. 


      Is there another way to do it - perhaps grant 'shares' or assign them some number that would then go into an equation that would determine their payout for that given year?


      Thanks in advance.

        • Profit Sharing Plan for Startup
          WSBryanJaneczko Wayfarer

          Hi Sammythem!


          For the future if you want a flexible plan, I think a profit sharing plan for employees should be separate from your partners. If you have 3 partners and you've allocated 1/3 of the profits to each of the partners, then create a separate 'pool' of money for employees which can then be paid based on the employment agreement, inlcuding length of time, to the employees. Partners can get their share of the profits after employee bonuses or incentive compensation has been paid.


          For example, you hire 3 employees and offer them a bonus based on profitability of business. You might say that 3% of the business profits might go to the employees, so that each employee would be entitled to 1% of the profits. Once this 3% has been paid to the employees, the remaining profit can be split among the Partners.


          Another scenario might be to simply offer the employees a performance based bonus. You document what the employees each have to achieve with measureable benchmarks. If the employee hits or exceeds the benchmark, then he or she is entitled to the bonus... typical bonuses can range from 5% to 100% of salary depending upon the industry you're in or the role that the employee is performing. (Sales type roles usually have a higher bonus/incentive structure with a lower base salary.)


          I'm not sure if I answered your question completely, but I hope this helps!

            • Profit Sharing Plan for Startup
              sammythesm Wayfarer

              Thanks.  I think your approach is a good one.  I was trying to get too complicated in my formula, but as you point out - if I just designate that there will be a certain pool of cash and that it will be distributed equally among employees, that makes good sense and can be written into an agreement.  Then I just come up with the amount that makes sense for the cash pool. 


              I also thought to throw in a line about proration for the year, as it wouldn't be fair to give the same amount of sharing to an employee who had only been there one or two months.