Tax Implications of different profit sharing


-1

Assuming 2 partners were to invest an equal amount of cash, say $50,000, but have different ownership/profit distribution should I be worried about potential tax consequences down the line?

My buddy has more intimate knowledge and contacts in the field for which we are looking to start a business. He has proposed an ownership and profit sharing structure of 66.67% and 33.33% even though we will be putting in an equal amount of capital. I have heard some things about our "tax basis" and/or "capital account" becoming messy down the line. I wasn't sure if or how this was the case. Also, if we do move forward with this structure is there anything we can do to prepare for potential problems and avoid them before they occur?

Thanks.

Tax

asked Aug 29 '13 at 12:28
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User27645
1 point
  • What tax law are you talking about? – Littleadv 10 years ago
  • Jurisdiction would probably be helpful here. – Steve Jones 10 years ago

1 Answer


0

Treat the 100k (50k each) as loans to the business you and your partner make yourself. Every month the business should pay these loans back to you and your partner. It can pay you guys 1k for 50 months until its all paid off. This can be done as a standard loan, with interest, and even have a 12 month grace period with no payments to get the business off the ground.

Here is a general example of how you could do your accounting.

50k Gross Income all sales

10k Business Expenses (hosting, rent, etc)

40k = Business income after expenses

2k Repayment of loans (1k to each partner for 50 mos)

38k = left over after debts paid

5k Salary to you

5k Slary to your partner

1k Employment taxes

27k = Net after salaries.

This 27k is what you would split as profit. If you are a corporation this money is paid out as disbursements and taxed as a lower level (since you already have salaries). So you would get 33% of the 27k and your parnter would get 66%,

Please let me know if the above method makes sense. But the main objective is to break down your initial investment as loans to the bisness to keep things clean and to make sure you get your personal money out in a reaonable time.

answered Aug 29 '13 at 19:49
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Frank
2,079 points
  • If the country is "US" and the organization is "Partnership" then your suggestion is not good at all, and may cost more to the OP on the long run. – Littleadv 10 years ago
  • You only should form a Partnership (and even in that case an LLP) if you are not able to do business as a corporation. A good example would be a law firm which cannot operate as an INC. Even then, you can break your firm down into two companies (LLP for law practice), (INC for marketing efforts) and take advantage of some of the tax savings above. – Frank 10 years ago
  • I'm not sure I follow you. You didn't bother even asking what country the OP is in, and then you make a mountain of assumptions to justify your answer. Why? Your answer is wrong in many cases. For corporation, for example, a better solution might be to create different classes of stocks. – Littleadv 10 years ago

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