This is the first post in a series on how to distribute the profits created through a group effort. An incoming generating business has two areas of worth, the income stream and ownership. Measuring contributions to the project is the other half of the equation. This first method was discussed with two collaborators on a current project.

Having a mechanism that is clear and agreed upon lets contributors know what they are getting into and is an effective recruiting tool since potential contributors can make informed conclusions about the potential real-world value of their contributions.

Hourly Weighted Profit Sharing

At the end of each income period, the profits are divided between contributors weighted by hours worked.

This scheme addresses only profit sharing and not ownership. Its a simple plan that requires a certain amount of trust. Lets say the income period is one month. Each contributor records the hours worked throughout the income period. The business income has expenses and reinvestment taken out. What is left is profit. Each person's share is their hours worked for the period divided by total hours worked for all contributors.

Notes

Value: There is no distinction between hours worked by different people. Each person's contribution is considered equally valuable. Each person is trusted to honestly record useful hours worked on the project.

No income: If there is no income for the period, the hours accumulate until there is a period with a payout.

Implementation

We are using a shared google docs spreadsheet to keep track of and total the hours worked. Another spreadsheet will be the general ledger of the business, showing income and expenses. The last day of each month is the end of the payment period.

Legal: In this case, the business is owned by my sole proprietorship. Each contributor is paid on a 1099-MISC form. If significant profits occur over time, another structure such as a partnership should be looked at and probably has better tax benefits.