Does ‘ownership’ or ‘control’ of a business match contribution to capital or input?

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Question: 

Generally speaking, an efficient allocation of ‘ownership’ or ‘control’ of a business is one that matches contribution to capital or input. For example, if I commit 60% of the resources a business requires (human or other capital), then I would expect approximately 60% control (ownership). It seems that both Partner 1 and Partner 2 contributed the same amount of cash equity (each secured “the same” loan to fund Business 2). Therefore, a starting point is that each Partner has equal ownership (on grounds of invested risk capital). One might also consider that Business 1 is a ‘partner’ because of the subsidization of land (rent) and Partner B’s salary. Business 1’s contribution is an amortized amount of rent and salary over the years in which Business 1 will subsidize Business 2. In this case, Business 1’s ownership is not trivial and should be recognized as risk capital to be repaid by Business 2 or purchased by either Partner A or Partner B at some point, giving the purchasing Partner a greater share of the remaining control.

Answer: 

Partner A secures a loan for startup through a business (business 1) he owns 90% of. Partner A will have significant input in business decisions but little to do with day to day operations. The new business (business 2) is in a different industry but dependent on his already successful business for success and will be located on land owned by business 1. After 5 years business 2 will start to pay rent to business 1 for the use of land at a reasonable to discounted rate.

Partner B secures a loan (the same one as Partner A) through business 1 of which he owns 10% of. Partner B will have significant responsibility in the startup of business 2 and its day to day operations. Partner B will not be paid an employee salary from business 2 but will continue to draw his same salary and shareholder distributions from business 1 even though most of his time and effort will now go to business 2. Up until now Partner B had a greater responsibility than Partner A in the day to day operations of business 1 so draws and salaries by Partners A & B from business 1 were equal.

What do you think is a fair split of ownership % for business 2 if nothing changes with business 1?

Answered by:
Keri Jacobs image
Assistant Professor
Iowa Institute for Cooperatives Endowed Economics Professor
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