Simple business arrangment question.
I didn't know which forum to post this in.
I am entering into a simple business arrangement as a silent minority owner, we have drawn up a one page document. The profits (if any) will be paid out in the form of dividends.
My question is whether I should be just putting it under my name or incorporate or what. The amounts are small, potential profits not expected to exceed 10K a year.
In case of total loss (bankruptcy) or good returns, which one is more advantageous and in case of litigation/liability which I don't expect any but you never know, what protects our assets bests (house, cash, stocks).
Well, unless you incorporate, your profits will not be paid out in the form of dividends.
Without incorporation, you are in a partnership. With a partnership, your income is divided by the % ownership and you are required to report this as self-employment income each year. Also with a partnership, each partner is effectively 100% liable for all liabilities/lawsuits/etc., irrespective of their % ownership.
If you want to maintain a partnership but still have limited liability, you would want to set up a limited partnership. In this arrangement, the taxes are still being paid as self-employment income each year, however, you are required to have at least one general partner and the rest can be limited partners. Here, the general partner takes on all the risks, whereas the limited partners risks are limited to only 100% of the investment they have previously made and no more.
Thanks for both your answers.
As you may tell, I am a newbie in this kind of arrangement.
Simple outline is; a store with a majority (60%) owner and further, up to 5, minority owners of which I am one. I can simply put my portion under my name and pay income tax on whatever profit and if it sinks deduct it as bad business investment/loan.
I'm trying to see what the other options are and what advantages they bring. The investment potion is small, 10K, and returns would probably not surpass 2K in a good year.
If all you do is set up a partnership then it will end up being a regular partnership and as I said, even though you may not have much of an upside interest, a good lawyer will ensure that you have 100% downside liability if things go wrong. Eg, lawsuits, unsecured debts of the business, unpaid employee wages and severences, etc., etc.
If I were you I would make sure that you set up a limited partnership so that your risk is limited to your original investment. Good luck.
In a limited partnership, is it between me and the rest of the investors or me and the entity? Like I said, and thanks for your patience, I am new at this.
I may be misreading, and if so, I apologize, but it seems to me that you guys might be talking about different things?
Original poster, are you asking if the COMPANY should possibly incorporate or if you personally should have a holding company to receive the dividends?
Personally, I'm with the others who think a layer of incorporation between you and the company is cheap insurance against unlimited liability, which could ruin you, but you don't need to double it if the actual company is incorporated, you own your share as actual share ownership, and you really are receiving dividends.
However, if the actual company runs as a partnership or some other unprotected version, then it might be worth it to you to have a holding company... the only downside with that is that you personally are bearing all the costs of incorporation instead of splitting it between all your other "partners".
The business is likely set up as a corporation - wouldn't the cheapest option be to issue preferred shares to the silent investors with a residual dividend policy in place with proper legal groundwork?
Also worth taking into consideration: seems to me the incorporation fees + yearly upkeep (corpo renewal/income tax report/etc) for the OP corporation represents a significant portion of the best-case scenario of 2k profits / year from his investment. It may just not be worth it.
I agree that the OP must protect itself from (very real) risks in case anything goes wrong. Again, good legal advice + costs to implement said advice may just outweigh the potential gains of 2k/year...
I'll check how the company is setup.
To answer stephenheath, it is my portion that I am concerned with mostly, not how the other partners have set themselves up.
One more thing, we are thinking in the near future to buy a rental property, a condo or two, keeping that in mind with the above situation, does it make a difference?
I'm more of a stock market guy, this is my first foray into an enterprise like this.
Last edited by MrBurns; 2012-02-28 at 09:55 PM.