Discussion:Sole Prop, Partnership question
From TaxAlmanac
Discussion Forum Index --> Accounting Questions --> Sole Prop, Partnership question
| 11 January 2008 | |
| Hi all,
I have a situation, I have never heard of before. If any of you guys can help...thanks. I have a new client. She and another are opening a business. They went to her attorney to discuss which legal entity they should organize under. He convinced her that both of them can be "sole proprietors". That at the end of each year, they split the expenses, income etc and each file seperately. This does not sound very legal etc to me. Any of you ever come across this type of situation. Is this an unusual request? | |
| 11 January 2008 | |
| I agree completely and explained all of this to her...but the client insists her Attorney told her she does not have to legally form a Partnership to report her and her "partners" income, that they can be both sole proprietors of the same business. That he and another Attorney have had this kind of accounting relationship for years. It just doesn't sit well with me. | |
| 11 January 2008 | |
| What kind of business is your client starting? It can go both ways depending on certain circumstances. i bet the attorney is trying to fish out more accounting fees. =) | |
| 11 January 2008 | |
| It is a retail shop, very small. Minimum inital investment (less than 10,000). The Attorney told her to ask me to handle all of the business concerns as he will handle the legal. He told her she would have to pay about 500 to set up a partnership for her that she will not need. I know they can set up a partnership for less. She insits he told them they can both own the company without a partnership agreement or filing as one. Any ideas Pegoo? As I said before this is the first time I have hit upon this kind of business relationship. | |
| 11 January 2008 | |
| It's a partnership. Altough she do not have to get a LLC or anything and can run as a general partnership. The partnership will still have to file a 1065 and report income on K1. She can buy a partnership agreement template online and have it notorized but of course you or the lawyer should review it.
She have one lazy lawyer, I have to say..... | |
| 11 January 2008 | |
| The lawyer may be thinking of the new rule that allows husband and wife owners of a business to file separate schedule C's on their 1040 instead of 1065. | |
| 11 January 2008 | |
| Number 1 I'd say: if it's a retail store, someone could slip and fall etc., you want to be a LLC (1065), not a common law partnership. On your other point, if they are under one roof, and it sounds like they are, unless they can keep things totally separate, including separate checking accounts, the lawyer's idea is insane. I would tell them that if they want to stick with the lawyer, make sure the fellow is willing to sign/prepare their returns, and stand by his work. Check out PBinNJ's point, if that applies also. | |
| 11 January 2008 | |
| note that the attorney is using this method of accounting and hasn't been audited therefore is giving bad advice. He probably really has an expense sharing relationship anyway, not a revenue sharing relationship. | |
| 11 January 2008 | |
| I agree, he's under the same roof with a bunch of other lawyers (separate businesses), and he thinks this will work for a retail store. Let's face it these partners/LLC members are going to be pooling their assets, buying inventory, etc. | |
Phil Moody (talk|edits) said: | 11 January 2008 |
| They may not be partners.
They may be a "joint venture". Sometimes people do not want to be partners with others merely because they have a common activity. Joint ventures have no ID number, each use their own. There is no separate filing for joint ventures. This is common in the construction industry, as well in farming. | |
| 11 January 2008 | |
| True, but that's usually on a one-shot deal: i.e. developing a piece of land. I guess if they were opening to take advantage of a season: Christmas decorations etc., you could go with that. But for continuing operations, it's a stretch. | |
| 11 January 2008 | |
| Thanks for all of your input. It is obvious my paranoia on the situation is justified. I am meeting with them this week to discuss how to proceed. These are sisters, if I were going into business with my sister, I would want a partnerhip agreement to protect my rights in the business relationship...but they have this trust thing going on. I had that trust thing with my EX husband too and look where it got me. I have told them if one of them wants to be a sole prop and share the profits after the fact...fine....but I will not "split" the expenses and revenues. | |
Bottom Line (talk|edits) said: | 12 January 2008 |
| I believe the attorney is doing them a disservice by not talking with them about a buy/sell agreement. What if one of them becomes incapacitated and needs someone to handle her affairs? What if this person is a husband and the healthy sister and her brother-in-law hate each other? I recommend all my businesses with more than one person see an attorney regarding business succession. | |
| 13 January 2008 | |
| Once again thank you all. I had quite a long talk with my client and convinced her to file as a partnership. She agreed! | |
Phil Moody (talk|edits) said: | 13 January 2008 |
| Good luck. Did the other partner agree to this?
Do both partners know that they are now liable for each others business activities? Maybe the attorney knew something you did not, perhaps from the other partner?? Who is going to prepare the partnership agreement? Are you going to notify the attorney? | |
| 13 January 2008 | |
| Thanks for your feedback Phil. Both people have agreed. Yes they are both aware of what a partnership means to both of them. The attorney they went to was not "their" attorney, but someone they knew. I could go into detail and what I found out about their discussion, but this is not the place. We are all sitting down to form the partnership agreemwnt. I have advised them to have an attorney involved to protect their rights. | |
