Diane Kennedy
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- Aug 31, 2007
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A friend / business partner and i are looking to partner up and im unsure which option is best.
We plan on setting up a company so all the assets sit under the company and then we pay out a salary to the two employees me and him. Currently my business is sole prop and mixed in with my personal finances and the goal is to seperate this including debt and put it into a company and than evaluate from there. We are definately going to setup some beforehand aggreements to get things rolling smoothly but we want to make sure legally we have everything squared away.
From my research it seems as if s-corp is the way to go.
What is it about the S Corp that you like?
There are a lot of technical issues with S Corp that you can easily find with research, but here are a couple of questions to ask that you might not normally consider:
(1) Will income/loss be divided up based on ownership?
**If so, S Corp can work. If income/losses are divided based on a formula of who does what work, capital contributed, etc...than you will need to use partnership law and in that case an LLC will work better.
(2) Do you have the same needs/desires for benefits from the company?
For example, you are both on the same page for pension plans, employing family, auto allowances/purchases, etc... **If not, consider an LLC & than have each of the members set up their own company structures. For example, you may want to have an expensive car that is paid for by the company and your partner might want to fund a pension plan to build for the future. Frequently with S Corps you end up with the lowest common denominator of benefits. No one is very happy, but no one is very unhappy either.
(3) Will you be building appreciating assets (either tangible or intangible)?
**NEVER NEVER NEVER put appreciating assets into any form of corporate structure if you have a partner. You end up being "stuck" and never being able to move them out without tax consequences.
S Corp is easier to run than the multi-layer business structure I prefer. And it's DEFINITELY a step up from a commingled Sole Prop (yikes).
And just to get it out there, the reason the Sole Prop is such a bad business choice:
(1) You put every single one of your assets at risk.
(2) You pay more in taxes (self employment tax is an extra 15.3%)
(3) You are TEN TIMES more likely to get an IRS audit.
The only thing worse than a Sole Prop is a General Partnership. With a GP, you not only get all the bad things above, you get them times two. That's because you're now not only liable for every stupid thing you might do, you're also liable for every stupid idea your partner might do.
So, big kudos for asking this question and realizing you need a structure.
Regardless of what you end up with, make sure you cover the 4 D's in your agreement:
Death
Divorce
Dissolution
Debt (Insolvency of a partner)
In a partnership, the two biggest problems will be: not enough money and lots of money. Have the conversations on how you will handle both items. Your relationships with your partner will never be better than right now, so get everything hammered out in your agreement. That way if it goes south, you have your agreements in writing and you don't need to end up in court!