Which is better: general partnership or sole proprietorship?
I want to go into a 50/50 partnership with an individual, but we don't know what our profits/losses will be for the year. It is a business that each partner's income is based off of their own revenue generation through working with clients (different hours and contracts won't allow for an equal 50% distribution).
The problem is if I generate myself $80,000 for the company and he generates $15,000, won't we he have to receive 50% of the total $95,000 (80,000 + 15,000)? I understand there is a special allocation that you can elect, but we won't know the percentages until the end of this calendar year? Plus, I also want to take advantage of the S-corp tax liabilities.
Is it possible to have a partnership with unequal incomes or is it better if I just start my own LLC and have it taxed as an S-corp entity?
Great question. While there are obvious tax advantages to being an S corp I would highly encourage you to have your accountant look at your books and see if an S corp actually makes sense for you right now. There are additional expenses associated with an S corp to make sure you are reporting things properly. These additional expenses might not make any difference to you but without knowing the additional expenses you will not be able to make that determination.
If you were my client, based on what you just wrote, I would advise you to become an LLC taxed as an S Corp with your partner. Since each partner is working within the the company, the IRS requires you both to draw a paycheck. Many sales people are paid a commission and you both would be sales people, you both should be paid a commission based off of your individual revenue generation (i.e. sales).
The simple concept is if someone is doing Business alone(single person/Sole ) then he can use do under proprietorship. Formalities are very less in this.
If there are two or more persons including over in the formation and running of Business then Partnership form is opted wherein they can mutually decide on the share percentage. Or even LLP ( limited liability partnership can be formed and agreement can be made and firm name can be registered in RoC.
A single person can also opt for private limited company.
As the business structure becomes complex and levels up from Proprietor to Ltd, formalities also increase. A chartered accountant can guide on that.
You have not given any reason that you want to form a "partnership."
The contributions do not seen equal.
The main objection that I have with the partnership idea is the unlimited liability that it subjects you to in all situations. This can be more damaging that a poor equity arrangement.
The S-Corp "Offers" no tax liabilities. The tax impact is similar, as in ordinary income or loss, to either an LLC, a sole proprietorship, and a partnership.
How you split the income/profits is up to the two of you.
I would suspect that there is more here that you are not disclosing.
yes you figured this out---RETHINK and promote TRUST between you folks
It's not possible to advise the best course of action for you without knowing a lot more detail about your business and your goals. As someone else noted, "why do you want to form a partnership to begin with?" Is it for expense sharing? For marketing purposes? You really need to sit down with a tax professional who knows the details and what you are trying to accomplish. As noted many times, the answer to every tax questions is "It All Depends...."
There is no such thing as a 50:50 partnership in your personal life with your spouse, nor in business with a partner. Sole proprietorship is the better way to go for avoiding ownership disagreements. At home your spouse is the boss and at work you are the boss. It's a beautiful thing.