How can we achieve a balanced 50/50 ownership structure between two parties when one prefers a salary and the other prefers dividends? In my case, one ‘owner’ currently holds 100% of the registered interest, but both parties have agreed to split compensation equally. The challenge arises because one party wants to receive payments throughout the year upon completing work, while the other prefers to receive dividends. It’s important to note that this is the company’s first year.
What strategies can be used to equalize these two forms of compensation? I would appreciate an example with fictitious figures, including corporate and personal tax rates, to help illustrate how I might apply this to my specific scenario.
2 Responses
To address the situation of equalizing compensation between one owner who prefers a salary and another who prefers dividends, it’s important to first understand how salaries and dividends differ in terms of tax implications and cash flows. Here’s a structured approach to find a balance.
Step 1: Define the Total Compensation Package
Let’s assume the parties have agreed to a total compensation for the year of $100,000 split 50/50, meaning each owner is entitled to $50,000.
Step 2: Decide on Salary vs. Dividends
Step 3: Understand Tax Implications
To illustrate, let’s use some fictitious tax rates (make sure to substitute them with actual rates based on jurisdiction):
Step 4: Calculate Tax Impact for Each Compensation Method
Scenario 1: Salary for Owner A
Corporate Income Calculation:
– Assume the company makes $100,000 in profit before salaries.
– Corporate Tax = $100,000 * 21% = $21,000
– Net Income after Tax = $100,000 – $21,000 = $79,000
Owner A’s Salary
Scenario 2: Dividend for Owner B
Dividend Calculation:
– After corporate tax, the remaining profit available for dividends is $79,000.
– Personal Tax on Dividends = $50,000 * 15% = $7,500
– Net Amount to Owner B = $50,000 – $7,500 = $42,500
Step 5: Compare Net Amounts
Step 6: Equalization Strategy
To equalize payouts, consider the following strategies:
Owner A could take a smaller salary, and Owner B could take a larger dividend such that both ultimately receive $50,000 after taxes.
Reinvest Profits:
If the company can afford it, reinvest part of the profits to minimize initial distributions while covering the compensation preferred by each party in future years.
Pay Dividends After Tax Distribution:
Example of Adjusted Compensation
Net = $30,000
Owner B takes $70,000 in dividends:
This method can help balance the total net payouts to meet their original “50/50” agreement by addressing their unique compensation preferences.
Final Consideration
Consulting with a financial advisor or tax professional is highly recommended, as they can provide insights based on actual
This is a common dilemma faced by many startups and partnerships, and it’s great to see both parties willing to work towards an equitable solution. One potential strategy to equalize compensation while respecting each partner’s preferences could involve establishing a formal agreement that outlines a salary and dividend distribution plan.
For example, suppose the company generates a net revenue of $100,000 in its first year. You could negotiate a reasonable salary for the owner who prefers steady income. Let’s say you agree on a salary of $40,000; this would entail a personal tax rate of 25%, resulting in a net take-home of $30,000 after taxes.
The remaining profit, $60,000, could then be allocated for dividends. If the second owner prefers dividends, you could distribute the remaining profit equally, providing each owner with a dividend of $30,000. If dividends are taxed at a lower rate, say 15%, this would lead to a post-tax income of $25,500 for the dividend-preferring partner.
Together, this arrangement gives both owners a total compensation of $55,500, balancing the immediate salary needs while still providing the dividend preference.
Additionally, consider drafting a shareholder agreement that includes a profit-sharing model that might adjust over time. As the company grows, you can revisit this compensation structure to find other creative solutions, like retention bonuses or performance-based incentives, ensuring both parties feel valued and invested in the company’s success.
Open communication is key, so regular discussions about financial