Owner vs. Employee
Updated: Nov 2, 2022
(you know you can be both, right?)
I have been asked this question (no that’s not true)… I have run across this issue with clients and in one of my own businesses. It is is a tricky one, both conceptually and in practice.
Typically, this issue arises when two partners solidify their arrangement to be co-owners of a business. Then after they smile and look at each other they realize they are not sure who is going to do what. One of them is planning to devote their full time to the venture, while the other one has a part time job and can spend “some time” in the business. So…how are we going to get paid for our work, or are we both “OWNERS” so we do it for the company and share in the profits at the end of the year?
If you’re the part time partner you are loving that idea, because the full timer will be cranking out the hours and you get to share, pro rata, in the profits at year end. That’s not the way it works. Yes you are both owners and, yes, you will share in the profits at the end of the year, but your business needs to get work done and it needs to pay someone to do this work. That’s where you take off your OWNER hat and put on your EMPLOYEE hat.
As part of your Unanimous Shareholder Agreement, you may have addressed the issue of how an owner/partner will be compensated for their time for any (specified) work in the business. As such, each of you will have the comfort and understanding that you will be paid for the work that you do. Then, when you sit down at the end of the year and look at your P&L (profit & loss statement / income statement), you will be dividing the profits as you have agreed, however, the profits will already have addressed the wage expense that was paid to the owners in their respective roles as ’employees’ over that year.
A practical example… I formed a partnership to purchase the land, business and building of an oceanfront property. The intention was to use the land to develop an oceanfront cottage resort. We had not originally planned to operate the business that was part of the package as it was not particularly profitable and we didn’t have the expertise. However, in my quest for equity partners I came across a fellow interested in the venture we were undertaking AND who had the expertise in operating the business that was included. Bingo! We would continue to operate the business in the hope we could… (A) run it more efficiently and profitably (B) use any proceeds to help fund the development.
Unfortunately, the fellow did not have the tools necessary to be an effective operator/manager. As such, in my capacity as the major shareholder and President of the company, I had to remove the shareholder in his role as an EMPLOYEE. He was still as much an owner as I or any of the other shareholders, but he was no longer an employee of the corporation.
One hat?…. Two hats?…. You can wear however many you and your partners agree to.