If you think you had a couple of separate businesses and it turns out that you really had a partnership you can end up with a pretty ugly mess …
When it comes to structuring a business, you have many choices: LLCs, S Corps, C Corps, LPs, LLPs, etc. So how do you choose the best option?
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 being done.
So, if your business dynamic is changing from what you first structured it to be, you may need to restructure it in order to reflect the current business model it has become.
Reference: Forbes (October 21, 2012) “Beware Of Partnership Status Sneaking Up On Your Business Venture”