Distributing profits when a Joint Venture starts to make money?

My question concerns the tax implications of distributing profits, if and when the hard work pays off.

In my case all of the expenses and income have flowed through my business account (S corporation). I collaborate with a partner, but a joint company was never set up. The theory was - let's get something working first, and then 'worry' about paying ourselves.

So what are the options for distributing profits?

Employ my Joint Venture business partner
Set up a separate company
Just write a distribution check each month? (Not sure how this would work)

We are both software consultants and already each have our own company, but we don't really want the hassle of setting up a joint company as well.

Whats the most practical (and legal) way to distribute the profits?

USA Corporation Profit Sharing

asked Apr 1 '13 at 08:43

Robotronic
1 point

1 Answer

Whats the most practical (and legal) way to distribute the profits?

I would suggest a General Partnership. Since you both have your own companies set up, liability probably isn't an issue (the companies would be the partners, not the individuals), and there's no reason for all the hassle of yet another company setup. Just form a partnership, and file form 1065 for the distributions.

You'll probably need a lawyer and a tax accountant to advise you on how to set up the partnership agreement and how to report the distributions properly. You'll have to calculate your respective basis in the partnership based on what you've spent so far (that's where the accountant will come in handy), and agree on distributions and responsibilities for losses and work (that's the lawyer's job to draft this part).

The partnership will then accumulate the income and distribute it per the agreement (write checks from the partnership account, technically), and report the distributions on form 1065 and K-1 forms for each of you. From there on it will flow down to your (company) taxes.

In most states, no registration is required for general partnership, and the tax forms are only reports, partnerships don't pay taxes (there may be some specific rules for out-of-state partners though).

answered Apr 1 '13 at 10:13

Littleadv
5,090 points

Thanks, I appreciate the feedback. – Robotronic 11 years ago
It still sounds like a learning curve, and a moderate investment of time to get this all organized.
(Note to self - Must learn how to get paragraphs formatted) _ Any suggestions on a threshold of profitability before this makes sense to implement? For example, currently the informal venture is netting just a few hundred dollars a month. I can see this eventually scaling, but have been procastinating regarding all the formal paperwork. I was hoping there would be an intermediate step, just to get some of the profits shared before ramping up. – Robotronic 11 years ago
@Robotronic since you both already have companies set up, I see no reason why a general partnership would be a high overhead for you. It in fact is something that you might find yourself **required** to do by default, since you are, in fact, a partnership. I'm suggesting to formalize something that's already in place. – Littleadv 11 years ago
Thanks. I will consider setting up a general partnership. – Robotronic 11 years ago