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Small Business Resources
In exchange for three months of working capital, I have been offered 50% of a company. I am hoping to make it profitable as it’s currently losing money. Now that I am an active partner responsible for the day to day operations, would it be reasonable to request a salary or reimbursement for expenses even though the company is still in the red? Or would I be expected to forgo a salary and expenses until the company becomes profitable?
Hi Al, Interesting circumstances you're in. It brings to mind a general principle that I wish every entrepreneur could get into their bones. For a business to be successful, it must be able to pay everyone who works in the business. You, as an entrepreneur, wear at least 2 hats. You are a shareholder in the business and you are an employee in the business. For the business to be successful, the employee deserves to be paid the going rate for that position. In other words, if you were to hire someone to replace you on the open market, what would you have to pay? If you aren’t paying that, then the shareholder better have a chat with management about performance. In addition, you as the shareholder, deserve a return on your investment and on your risk. In theory, the higher the risk, the higher the return should be. So, should you be paid a salary? Absolutely. As should everyone in the business. Now we get to the practical. Should you be paid now? This is a function of your cash flow. In practical terms, if the business cannot pay you, then insisting on payment will drive the business into failure. If you do forego salary, that would be the same as having invested that money as shareholder and then received payment as employee. In that case, your foregone salary is equivalent to extra investment. That applies to all the partners. Given that there is only 100k in revenue, in practical terms, it is tough to see how it could provide reasonable salaries to at least 3 partners. I assume that you took this on because you feel you can turn it around quickly and drive up the revenues so that you can draw a salary. So, to answer your question directly, are you “expected” to forego? There is no general answer or common rule of thumb. You have to decide on your risk threshold and whether you will ultimately be fairly compensated, along with the other shareholders, for the degree of risk you take. You must also look at the company’s credit facility, cash reserves and short term growth potential to determine whether the company can pay you and survive. Good luck! Warren
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