You and your friends have a partnership, even if you didn't write up a formal partnership agreement. The partnership has to file it's own partnership tax return, Form 1065, separate from your personal Form 1040 tax returns. The partnership return will include a Schedule K-1 for each partner. Each partner has to enter the information from her Schedule K-1 in her personal Form 1040 tax return. That way, each partner pays tax on her individual share of the income.
You should go to a lawyer who specializes in small businesses to have a partnership agreement drawn up. You should also consult an accountant or tax professional who deals with small businesses for advice on record keeping and how to handle the taxes. If you've never filed a partnership tax return before, it would be a good idea to have the tax professional do your Form 1065 partnership return, at least for the first year.
