Business Advice Appreciated Please

[Shake&Bake]

A year and a half ago, my wife and I decided to invest in and open a bar / restaurant in a foreign country that we both live in. Due to my being out of country for a lot of the time, we brought in a trusted partner, as a director, into the company to help out, giving him a 10% share of the company. He was given equity as we were not generating any cash to pay a salary, and also to incentivise him to put sufficient work into the business. My wife and I financed the business with a personal loan of 100% of the substantial start up capital.

Fast forward to this year, and we are just now starting to generate profit, for the past year and a half, we have just been keeping our head above water, paying suppliers and employee salaries, (we have not been paying any salaries to directors or crucially has the company repaid any of the initial investment in this period). We are now a lot more well known (we were off the beaten track, but knew we had a good product for the long haul), and have built up a healthy client basis, and are getting more and more new clients each week.

So that's the background, the advice I'd appreciate is, now that we are generating a profit at the end of the month, I need to know how to disperse it fairly. My thoughts are that the directors salary should be a floating amount, based on revenue : profit ratio. So that directors are rewarded the more profit that is realised. Or if you think it should be fixed, how do you come up with that amount? What percentage of profit, should be used to repay the initial investment? I was thinking of 75%, once all debtors, salaries, utilities and eventualities had been accounted for. Then whatever was left would be divided up to pay director salaries. Then once the initial investment was repaid in full, the 75% would be dispersed as dividends to the directors (also sole shareholders) as per their shareholding.

Does the above sound fair, and make business sense. I know I'm asking a lot but if you could point me in the right direction, to a point of reference I'd really appreciate it, if it does make sense, or alternatively suggestions as to how you would do this.

BTW, we are all still very amicably involved, we just need advice how to move forward fairly.

Thank you.

[KevinCamaroSS]

You have three options for shareholders:

Option 1 - Salary
Option 2 - Dividends
Option 3 - Combination

How you decide will be based on your own individual set up. For example your 3rd director is putting time and effort into the business, perhaps that part should be salary-rewarded? The same for your wife?

Then, your loan can also be taken out at a reasonable rate based on the cash-flow.

All 3 of you could then also receive dividends based on the profitabilty.

[PurpleMoonlight]

What you can do will depend on the laws of the country the company is established and operates in.

Where is that?

[Eric Mc]

As you are in a country other than the UK, you should be, and presumably are, aware of the specific tax treatments of salaries v' dividends in that country.

[Shake&Bake]

Thank you, yes the country is outside the UK, however being a former colony, it still retains the majority of UK laws. So for ease of response, lets assume that it is the same. Again, I really appreciate the advice.