Contractor is equity partner, pay him hourly too?

[Ken Nyczaj]

Hey Everyone,

Settlement is next week for my first flip. I have some questions about how our profit/ payment structure is setup, here are the details:

--- 4 Owners in an LLC taxed as an S Corp

--- Myself and 2 other people have 30% equity ownership and the fourth has 10% equity ownership.

Currently we have agreed on that the GC/ my friend/ business partner who is a 30% owner, gets paid every two weeks an hourly wage but that payment is deducted out of his profit he receives at the end.

Should these hourly wages not be deducted from his profit and he makes profit plus hourly?

At first I thought no, because he brings the contracting to the table and has relationships with subs but, I've done the self prepared DM marketing campaigns, taking phone calls, building rapport with prospects to sellers, finding the deal, building our team (lenders, title, insurance) for the past 6 months, and did not get paid for any of that work. And, I will not be getting paid hourly for my continuous efforts in building a massive marketing campaign. Plus I will be helping him work on the house on the nights and weekends when I'm not at my full-time job.

That being said, this is now his full-time job where he could be putting in 40-60 hours a week, which certainly will eventually add up to more time than I've put in.

Is this a fair way to structure the deal? Should we be paying ourselves hourly for any work done in the business? Instead of hourly, should we set up an incentive program for him where he can make bonuses for money saved by using him opposed to subbing work out?

 Any advice would be appreciated.

[Bryan Devitt]

In the end the GC will be working I'm sure 40, if not 50-60hrs a week on the deal and every deal after that. If it is a 2 month deal then he'll have 320hrs into it at least, if not 400+. How many hours will the lawyer have into it? How many will they have on each deal after this because most of the paperwork and knowledge will transfer over. Same with the other people doing similar work. Their job gets easier over time, the GC's stays the same. If you're putting in hours doing labor to help and it is just you and the GC doing the work that isn't being subbed out, that should be factored in, but really all of this should have been written into the deal before anything was even started. I assume the GC is at least a competent lead carpenter, so if the deal loses money or breaks even the other investors lose 10 - 20hrs of their time. The GC normally has that just looking at the properties before anything is purchased. Then he'd lose another 2 months of pay, while everyone else has a job. Even if the deal goes good, there is a good chance that splitting the money so many ways the GC will lose money compared to what he would make if he just worked for someone else doing the same thing. Either way, this is something that should be talked about with the GC and if he isn't smart enough to know his own value and do the math, that is on him, but if I were you, I would feel like I was taking advantage of him