Sole Proprietorship vs. Partnership

[TJJ Enterprises]

Ohio!!!

I'm starting a business creating content websites and selling e-books. It's just me and my wife. She is helping by doing some E-bay auctions.

I'd like to avoid the additional things you need to do when you have "employees". Should we set up a general partnership vs a sole pro?

[Mr. Knowitall]

Is your concern that your business might grow to the point that you hire employees? (Every business owner's nightmare. ) If it's just you and your wife for the indefinite future, it would not normally make sense to structure the business such that only one of you was an employee. If, for example, your accountant sees a tax advantage in becoming employees, you could incorporate and both be employees of the corporation.

[TJJ Enterprises]

I know I will have employees down the road, but I want to be a corporation when that happens.

In the here and now, it's just me and her. Does that sound more like a partnership or does it sound more like a sole pro in my name with my wife as an employee?

[Mr. Knowitall]

In most circumstances it would increase your tax burden to classify her as an employee, as well as implicating various labor laws and regulations. Talk to your accountant about the tax consequences.

[US Citizen]

The IRS will allow what is called a Husband-Wife sole proprietorship (Revenue Procedure 2002-69). Then your business can be reported on Schedule C of your joint tax return and you can deduct health insurance for both your wife and you as self employed health insurance as a deduction to arrive at adjusted gross income, which is an advantage. If you pay a tax preparer, make sure that the tax preparation fee is split between Schedules C and A, as any amount taken as a tax preparation deduction is more valuable on Schedule C than Schedule A.

As for the legal form of your business, it depends on what you want to achieve. But you will want to avoid partnerships and other pass-through or partnership like entities because you will have to file separate returns which is usually not to your adavantage. You could form a C corp and immediatley elect Subchapter S status, which gives you the protections of a C Corp and the tax treatment of a partnership, while placing the entire ownership in one name in order to file jointly. You can find information on the Internet about the various legal business or seek out a lawyer.

[Bubba Jimmy]

Revenue procedure 2002-69 applies only to community property states, but there is good news. Beginning this year, a husband/wife business that is not incorporated can file as two sole proprietorships on two Scheudles C on the personal tax return. It provides no limited liability as an LLC or corporation can, but it is a very simple entity for tax filing purposes. Of course all profits will be subject to the self-employment tax, something that may not be true for an LLC or corporation.