How to divide ownership of my business?

[kiqyou_vf]

So I have a business, I would like to offer a potential "partner" a percentage of ownership in the business. I know what I want to offer him, I don't know the proper term(s).

I'm NOT looking to form any corporation or elaborate type of business setup. I need to know if this can be done with a DBA/Sole proprietorship.

So, here we go: I own 100% of the business (DBA). I want to give this person a percentage of my business based on how many new clients he obtains (ie:10 clients = 4% equity, 20 clients = 10% equity). What exactly does equity mean in this context?

If the business brings in $10k and he has 20% equity in the business, how is this money divided? What is a 'normal' way of doing this type of arrangement.

Thanks in advance!

[rdc]

You cannot divide a sole proprietorship; inherent in the word "sole" is that it generally consists of one owner (sometimes exceptions apply for spouses/family etc). So, equity doesn't really apply in the traditional sense to a sole proprietorship.

If two people own "equity" in a business, and are not incorporated, they are generally deemed to be a partnership by law (intent is not an element). Within a partnership, it is possible to assign "ownership", and this is structured different ways (you may want to study the concept of capital accounts within a partnership). It can be structured so that the other partner has an interest in X% of monthly revenue after X point occurs, and/or that the partner has X% liquidation interest, so on and so forth. It can get complicated, but suffice it to say, if you bring in another person as a true owner, you are by default a partnership and a Partnership Agreement is a MUST (and must include provisions on voting, buy/sell, and profit/loss sharing, among others). You should talk to an attorney for this, and note that tax implications will arise as well when you get into partnership law.

Another option is to create a strictly contract-basis arrangement (independent contractor, preferably, versus an employee), where ownership of the company never comes into play. Rather, with a contract complete separate to your company, you set up a deal where X clients obtained entitles that partner to X bonus or X profit share or whatever else. Voting (management of the company) in this sense would be preserved to you (though it could be in the former example as well, given the proper contract, creating more than one class of ownership in regard to voting rights).

Hope this helps some.

[StealYourDreams]

Profit sharing vs equity participation seems to be what you're looking for. Also, I'd be leary of being a sole prop. with employees. You may be exposing yourself to a multitude of liabilities with zero protection.