I am a Director and co-founder of a small start up business. My business partner and I hold the shares 55 to 45 (me). My business partner is the Managing Director and invests 20 hours+ each week operationally. I invest around 5 hours. My question pertains to how to best capture the Directors' lost time in a business without revenue at this stage. Should we come up with a seperate agreement to pay out once profitable or journal in balance sheet?
Clients of mine who are like this agree on a wage to pay each other based on job within the business & hours worked.
They then split profits based on ownership percentage.
How to record when there are no profits you'd have to check with your accountant.
The best way to capture directors' investment of time in the business would be to accrue director's fees via a journal entry. Say you have agreed that each hour you invest in the business is worth $100, if you have spent 20 hours in a week that would equate to $2,000. To accrue this you would debit directors fees account (profit and loss) and credit directors fees accrued account (balance sheet). Once the company has sufficient cash flow, the accrued directors fees can be paid out.
The above $2,000 would be counted as wages for purposes of Workers Compensation Insurance, so would be needed to be included in there too.
Hope this helps.