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
Of course, the accidental partnership
is not the only pitfall. Be sure to read the original article for the full
(October 21, 2012) “Beware Of Partnership Status Sneaking Up On
Your Business Venture”