A Couple of CC Questions Relating to Profit Sharing and Expenses

[sterne.law@gmail.com]

In terms of entering into a cc. Most cc are registered with the shareholding as R100, hence you can alter it t 70/30 with a payment of R30.
Then accounting can make the neccessary alterations in terms of loan accounts and such.

[BusFact]

I've spent a lot of time in the past pondering about doing my own thing completely. However, during the past month or two of working with my friend on an informal basis, I've realised that we work together well and that our skills complement each other. Perhaps I could make it on my own, but two heads are better than one, and by combining our efforts we can accomplish much more than either of us could do alone. As John Maxwell put it, "one is too small a number to achieve greatness".

I'm keen on the partnership thing, as long we can iron out all the kinks in the cable. I spoke to him briefly this afternoon, and he understands my concerns with regards to intellectual property. What concerns him most about starting a new company altogether is the fact that he'll have to bear the costs (partially) of running two companies.

Is there not a way of you starting your own company without him and then you sub contract some work to him and he some to you? This way you get to work together without being tied into complicated arrangements. You can keep the same revenue streams, i.e. you invoice your customers and pay him 45% of the fee and he invoices his customers and pays you 45% of those fees.

[rfnel]

In terms of entering into a cc. Most cc are registered with the shareholding as R100, hence you can alter it t 70/30 with a payment of R30.
Then accounting can make the neccessary alterations in terms of loan accounts and such.

We saw the accountants over the weekend, and you were spot-on on the shareholding being R100.

[rfnel]

Is there not a way of you starting your own company without him and then you sub contract some work to him and he some to you? This way you get to work together without being tied into complicated arrangements. You can keep the same revenue streams, i.e. you invoice your customers and pay him 45% of the fee and he invoices his customers and pays you 45% of those fees.

We've come to an agreement. For the time being, I get 40% of the CC. We've left the possibility open to either convert the CC to a private company or to register a brand new company when we experience significant growth and start acquiring assets. At that stage we can go for a 50/50 split. Until then, we'll pay ourselves from the CC based on who was responsible for getting a contract and the amount of work done by each of us.

Thanks for your inputs everyone!

[Blurock]

....working with my friend on an informal basis

Riaan, do make sure that you also cover the expectations and duties of the shareholders. Do you have a shareholders agreement or buy and sell agreement?

The surest way to ruin a friendship (and the business) is to assume that the other guy will do as much as you, or vice versa. Make sure that you have clear objectives and duties and that all of that is covered in a document.

Good luck with your venture!

[Llewellyn]

Riaan,
How would you acquire the 40% in the company...by a pure CK2 change only
My suggestion would be to see what is the current equity in the CC. Although the original CC was started with an aggregate member contribution of R100 this would not mean that you can buy the share in the company for R30.
Furthermore I read that you stated that you would be paid based on the work generated...how would this be tracked?

2 Key questions need answers here
Firstly what do you want to achieve by becoming part of the CC?
Secondly How would the membership to the CC be achieve (Sale of % and based on what Valuation of CC or Equity, simply adding a new member, etc.)

In my opinion once you become a member in the CC, you would have to both decide how salaries / member remuneration would be paid.
A CC will pay taxes at 28% tax on income unless you go the STC tax route then it will be different so I foresee problems already as who would be fitting the bill for the tax? There is also a huge tax implication on how money is paid to members.
Then off course there is the question around the Buy and Sell Agreement that I would suggest you put in place asap. "A Buy and Sell agreement" governs what happens on death or disability of a member - in other words how the shares will be transferred to the remaining members in the CC. Further to that put a Share/Member Agreement in place governing the way things work within and between members.

Just a few ideas and questions really...

[rfnel]

@Blurock
We're in the process of making the agreement a bit more formal and drawing up the necessary documents. You've pointed out a couple of important things that I missed. That's what I love about the forum - helpful, knowledgeable folks abound!

Thank you for the good wishes!

@Llewellyn
We've filled out the CK2 under the watchful eye of the bookkeepers, and we settled on R60 for his share vs. R40 for mine.

With regards to payment, we've decided to allocate 20% to the member who brings in the contract and 10% to the other. We have a bona fide agreement to split the remaining 70% based on the amount of work done by each of us, which we track via detailed time sheets. Certain contracts (such as the work he does, alone, each month for his longstanding customer) are excluded from this agreement. In the event of a contract not being 'clearly' brought in by either of us (e.g. work from a website or customer referrals) we want to allocate a 15% cut to each of us and as usual, split the remaining 70% based on the amount of work done.

Thanks for explaining what a buy and sell agreement entails - I had no idea what it was when I saw it for the first time.

[mother]

Riaan, just a thought, perhaps I'm completely wrong: Shouldn't you also allocate some of your earnings to growing the business? If 100% of the fee of each contract is paid out to salaries, what will you use to do marketing, pay ADSL fees, etc etc. Or is the 100% you are referring to the remaining profit? Either way, the 2 of you must be VERY clear on what exactly that starting amount is, because that will have an impact on your individual responsibilities i.t.o. business expenses.

[rfnel]

Riaan, just a thought, perhaps I'm completely wrong: Shouldn't you also allocate some of your earnings to growing the business? If 100% of the fee of each contract is paid out to salaries, what will you use to do marketing, pay ADSL fees, etc etc. Or is the 100% you are referring to the remaining profit? Either way, the 2 of you must be VERY clear on what exactly that starting amount is, because that will have an impact on your individual responsibilities i.t.o. business expenses.

We'll pay ourselves after taking care of the CC's expenses. After all the expenses have been paid, we want to leave a minimal amount in the company's account - my understanding is that this will be best from a tax viewpoint. (Since our salaries are an expense, I understand that the CC won't be taxed on it, although we will pay tax in our personal capacity.)

[mother]

Oh ok then, I just misunderstood what the 100% was referring to. Still Riaan, you must be VERY clear on who actually makes these payments, which of the two of you have access to the business' bank account, and how will the 2 of you agree exactly what the expenses should be, and how much they should be. I don't want to sound like a prophet of doom... but something as silly as a telephone bill or an item of stationery could become a huge issue down the line. If say for example your partner is the one who has to "make" the payments from the business bank account, and you see that his telephone bill is consistently double what yours is, this could start eating away at your friendship & partnership, since your salary could have been bigger had his phone bill been smaller. So make sure you also set a budget/limits to the agreed business expenses.

Call me a sceptic, yes, but I would like to know exactly what can go wrong, even the smallest detail, so I can plan to avoid those little demons.