I entered into a business partnership with a colleague from work. We subsequently purchased two rental properties. We had originally intended to buy these two, "see how it goes", and then figure out if we wanted to keep growing the business. We had intended to put all money back into the company, with neither of us taking a salary ever, or distributing profits for the first couple of years. I was going to be accounting and rent collection and my partner was going to be manual labor. We each own the company and split profits 50/50. We knew up front going in we each had different goals for the profits, but had agreed to this basic plan. I want to realize gains ASAP, so I can quit my day job. He wanted to keep rolling all profits back in until he retires from his job in 20 years or so. We both agreed to roll all profits back into the business for the first two years and then re-evaluate with the promise that we would start distributing at least some of the profits at that time.
Well, about six months has passed and we now have a feel for what it means to be landlords and what the level of effort is. My business partner has pretty much decided that does not like having to be Mr. Fixit and doesn't want to be involved in ANY of the day to day activities being a landlord requires. So now we are in a conundrum on how to go about re-assessing who gets what profit and how much.
To me we have two options, and I don't like either. The first is to pay me a salary being the property manager and the second is to up my percentage of ownership in the business.
For option one, I am fine with doing the daily work. I also like the idea of keeping 50/50 ownership of the company, but I get a certain percent of rents off the top (like 10% or something) for doing all the work. However, this will count as a salary for the IRS. Now I have to do payroll taxes and such and that eats out of our profit. I don't like the idea of losing more of this money to taxes.
Option two, I am not sure how to quantify. How much "extra" of the ownership of the company should I get? And should this increase as we buy more houses? This does not seem fair to my partner, because we each put in the same amount of cash up front. If we just say I get an extra 10% of the company, then the more houses we buy the more work I'll be doing but I won't be seeing any "profit" until we decide to take distributions from the company. And as I said we had not intended to realize any gains but instead put profits back in and buy more houses at least for the first few years. I'm not sure I'm willing to do all the day to day work for the business, even if it means I'll have more ownership, if I don't get to realize gains sooner.
I guess there is a third option, which is to just pay a property management company. But like I said, i don't mind doing the work, I just dont' know how to compensate myself fairly for it without increasing my bookkeeping paperwork and taxes.
How do you all manage your partnerships, how do you quantify work or hours put in without a salary, etc.? Just curious how other people have set up their businesses.
