india
If a business cofounder leaves for a better opportunity, does he still get a share of profit ?
<p>Background: </p>

<p>We run a sports club in India which is about 9-months old firm. It makes less than 10Lakhs per annum and is yet to be registered as a private or partnership firm. My partner informed me that he will be leaving to another country for a better opportunity and will not be able to come for another year or two. Currently we have a 50-50 revenue sharing informal agreement since we know each other for many years. He is fine with a 75-25, but my father suggests we reach an agreement and close our deal paying him some money. I am puzzled and wonder how others handle this scenario. Thanks a lot. </p>

<h2>Legal Issues</h2>

<p>In general, it is better to agree on how to deal with the removal of a partner <em>before</em> it comes up, however, you didn't so here you are.</p>

<p>At this point, there are no legal issues here: whatever you and your partner can negotiate and agree on will be perfectly legal - whatever it is, you should document it. Legal issues will only arise if you cannot agree - then you will have a dispute and, if you cannot resolve it, you may end up in court. I will not hazard a guess on what a court will decide: in theory, they will try to determine, based on whatever evidence is available, what you agreed about separation when you formed your partnership.</p>

<h2>The Business</h2>

<p>I have no idea what your "sports club" involves and therefore to what extent it <em>is</em> an autonomous business and to what extent it is self-employment: that is, if you both stopped working in the business (perhaps engaging an employee), would it still generate revenue or is the revenue dependent on your personal efforts? Ideally, a business should be structured so that each of your draws a salary for the <em>work</em> you do and then split the <em>profits</em> left over. For example, if your sports club operates 7 soccer fields, 8 tennis courts and a clubhouse and employs 17 people then it is a business; if its just you two giving tennis lessons then you are self-employed.</p>

<p>The reason I mention it is that <em>part</em> of the <em>profits</em> that you take out are actually <em>wages</em> for the work you do and that he <strong>wont</strong> be doing.</p>

<h2>The Options</h2>

<p>I prefer your father's suggestion over yours for the following reasons:</p>

<ul>
<li>What if his opportunity extends beyond 2 years? Will you be happy paying 25% for 5 years? Or 30 years?</li>
<li>What if, by your efforts, you turn your business into a major enterprise and the revenues rise to hundreds of thousands? Are you still happy to share this 75/25?</li>
<li>Alternatively, what if you want to abandon the business? Will your partner be happy for you to close the business?</li>
<li>What if your partner (rightly or wrongly) thinks you are underreporting the income to reduce his share? How would that affect the relationship?</li>
</ul>

<p>Better a clean break - you can put in place a mechanism for him to buy back in if you want at a fair and objective price when (if?) he comes back.</p>
