Converting Employees to Partners.

[quicksam]

I have a client that is fed up with hiring and keeping employees. He owns a small restaurant. He is wondering if there is a way to bring his two best employees on as partners, so he can quit paying the payroll taxes and workman's comp. His idea is to pay them a percentage of the weekly gross. He doesn't want them to be able to keep the percentage of the partnership if they decide to leave.

Have any of you ever seen a company set up this way?

I am trying to wrap my head around all the pros and cons. If you have any thoughts please share.

Thanks

[BOB W]

What is the entity type?

[quicksam]

What is the entity type?

He is a Sole Prop. at this time.

[AJsTax]

Legal question

Only a lawyer well versed in partnerships could answer all those questions.
From experience I do know that you would likely have 2 employees that become partners and receive guaranteed payments, who, at the end of the year, would owe huge tax bills because they neither have a clue on the fact that they have to save for taxes or know how to figure out how much to pay in estimates.
I do not like partnerships for business ventures for many reasons. Also I am not seeing how you could say someone owns a share of the business as long as they work there. A method of buying them out would have to be established, so the original owner would end up paying for the business again.

[JoshinNC]

I disagree on partnerships

Only a lawyer well versed in partnerships could answer all those questions.
From experience I do know that you would likely have 2 employees that become partners and receive guaranteed payments, who, at the end of the year, would owe huge tax bills because they neither have a clue on the fact that they have to save for taxes or know how to figure out how much to pay in estimates.
I do not like partnerships for business ventures for many reasons. Also I am not seeing how you could say someone owns a share of the business as long as they work there. A method of buying them out would have to be established, so the original owner would end up paying for the business again.

They are generally the most flexible entity type, easier to set up and administer and more flexible in dissolution. Can what your client wants done be accomplished using a partnership? Yes. But, he does need a good biz attorney to help structure the deal for his own protection.

[ATSMAN]

I faced a similar situation last year with a LLC (Home Entertainment installers,taxed as a partnership). The founding 2 members wanted to keep one of their best employee with superior technical skills without whom they probably would have folded by now. Initial thought was to make him a partner with a guaranteed payment and fractional ownership. I told them to go to a competent attorney to get it structured because I can't help them in that regard. They came back with with an ownership structure of 50, 40, 10 (the former employee). There was no guaranteed payments to the employee. The employee contributed some of his old tools and equipment to the business. The employee was also free to do independent installations.