Q: My husband makes jewelry and I design Web pages. We want to sell his jewelry on the Internet and have started designing the jewelry pieces and the Web site. We are both sole proprietors. What is the most advantageous way to work together and share expenses and profits?
Name withheld
A: What's "advantageous" for some may not be for others. The best choice will depend on what's most important to you and your business in terms of ease, cost and protection from liability as well as tax consequences.
A partnership is the easiest and least costly agreement to establish. Because you're married, you don't even need a written agreement. But it's still a good idea to create one.
It's possible that being in business together may create some additional strains on your relationship. Remember that in the unfortunate eventuality of divorce, the partnership would have to be appraised as part of a divorce settlement unless you have a written agreement that provides how you'll value the business in case of divorce.
If you want to protect your personal assets from possible debts or liabilities of the business, consider an LLC--they're less expensive to form and maintain than corporations. If your company's earnings are high, however, consider a C corporation, which has deductions not available to partnerships and S corporations. Corporations can also protect your personal assets from business liabilities, but they're the most expensive type of business organization to form and maintain.
Another option is for one of you to employ the other. This lets you use Section 105 of the tax code to deduct 100 percent of your noninsured medical costs.
Whatever your decision, make sure to run these options by a tax professional familiar with family-owned businesses. For more information, visit Nolo.com, a legal Web site with a variety of resources.
Paul and Sarah Edwards' most recent book is Changing Directions Without Losing Your Way. Send them your start-up questions at www.workingfromhome.com or e-mail entmag@entrepreneur.com.
This story appears in the May 2002 issue of Entrepreneur. Subscribe »
