If you have an arrangement that might be viewed as a partnership, the safer course is probably to get a partnership agreement drafted or more likely form an LLC and have an operating agreement drafted.
There are quite a few ways of structuring a business entity. But how do you choose between the veritable alphabet soup of LLCs, S Corps, C Corps, LPs, LLPs, and so on and so forth? This can be quite a headache, since not all of them do the same thing.
A golden rule for business is to do business the way your business is structured, and to structure your business entity in the way you need to be doing business! If you mix and match, it has an unfortunate tendency to create serious liabilities which often come with a fairly aggressive tax assessment.
With liabilities and taxes in mind, consider reading a recent Forbes article titled “Beware Of Partnership Status Sneaking Up On Your Business Venture.”
While this advice is nothing new, yet another tax court case has come down the pike to confirm this conventional wisdom. In the case a father and son operated a moderately large agricultural business. The father and son, however, each formed their own entities, worked together to do the work, split the income equally, but disproportionately split the expenses. The IRS determined that this juggling of the books didn’t compute, so the IRS slammed both father and son with the taxes that would have applied on a single “partnership.”
You could say this was another case of “substance over form.”
Teaching point: if there are two business entities, then they must act like two businesses in order to be separate businesses. Otherwise, there should be only one entity, if such is an accurate reflection of how the work is being done.
Of course, the accidental partnership is not the only pitfall. Be sure to read the original article for the full scoop.
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Reference: Forbes (October 21, 2012) “Beware Of Partnership Status Sneaking Up On Your Business Venture”