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MI.5

Ownership and Profit-Sharing Distribution

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Currently in discussions with multiple business partners for a new start-up. Two of the members are women and we want them to have 51% ownership of the company (the other partners will equally split the other 49%), but we all agree to equally share the profits.

Key Question: Is there some business law that requires % ownership to be equal to % profits? Is it legally possible to structure a contract of agreement that reflects this? Are there any key elements of concern that should be addressed among the partners?

Thank you for your feedback.

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46 minutes ago, MI.5 said:

Key Question: Is there some business law that requires % ownership to be equal to % profits? Is it legally possible to structure a contract of agreement that reflects this? Are there any key elements of concern that should be addressed among the partners?

Thank you for your feedback.

 

No law outright prohibits the ownership interests and profits interests to be the same. But in that situation the business has to be careful about it does certain things and how the business itself is structured. For example, if the ownership interests and profit interests are different the company would not be able to qualify for a S-corporation election with the IRS and as a partnership would need to include certain tax provisions in its partnership agreement. Also, if the claimed 51% ownership by the women is merely on paper to qualify the business for certain preferences as a women owned business and the business is really controlled by men there is the prospect of fraud problems. The people forming this business really need to have a frank discussion of what they want to do and why they want to set it up this way with a good business attorney. If they still decide they want to do it, they need to see a tax attorney to make sure they get the tax aspects of this right.

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