My wife and her friend have started as independent consultants. It is in my wife's name but both have money in it. No LLC has been created. How do we file?

[RJoslyn21]

Does my wife file as the owner or still as a partnership?

[rjs]

A business owned by two or more people is a partnership, even if there's no formal partnership agreement. The partnership has to file a Form 1065 partnership tax return. Part of the partnership return is a Schedule K-1 for each partner. The partnership gives of a copy of the Schedule K-1 to each partner. The partner enters the information from the Schedule K-1 in his or her personal Form 1040 tax return.

You cannot file a Form 1065 partnership return with TurboTax Home & Business. You have to use TurboTax Business, which is a different product. TurboTax Business cannot be used online. It's only available as software that you install on your Windows computer from a CD or a download.

What do you mean by "It is in my wife's name"? What is in your wife's name?

What do you mean by "still as a partnership"? You said your wife and her friend just started the business. So what is "still"? Was there a previous partnership?

[RJoslyn21]

Their "business" was started under my wife's name not both of their names. They both contribute equally but its registered through parent company through my wife. Is it still a partnership?

[Opus 17]

Yes, unless she wants to steal it from her friend.

The business could be a sole prop owned only by your wife, with the friend as a W-2 employee or a 1099 subcontractor. In this case, the money put in by the friend is an investment that your wife is liable for. And any profits would go solely to your wife after paying wages to her friend.  That's kind of what it looks like now on paper, anyway, but I don't think that's what was meant to happen.

If this is really meant to be a joint owned business venture, spend some money and get the paperwork and registration done correctly.

[rjs]

What is the parent company? Usually if a business has a "parent company" it means that the parent company is the owner of the business, and the business is a subsidiary of the parent company. But you say that your wife and her friend own their business. So what is their relationship with the "parent company," and who really owns their business?

As Opus 17 suggested, it would probably be a good idea for your wife and her friend to sit down with a lawyer who handles small businesses, to clarify the ownership of the business and create the right documents to formalize the business relationship.

[RJoslyn21]

They are considered consultants for a clothing company. They buy their inventory (clothing) and then sell through their (wife/friend) website.

[rjs]

That doesn't sound like they are doing any consulting. It sounds like they are a retailer for a manufacturer or wholesaler. Or is this a franchise or multi-level marketing arrangement?

You seem to be saying that they have a contract with the supplier, but the supplier thinks the contract is only with your wife, not with a partnership. If the contract does not reflect the true relationship, they definitely need a lawyer.

This discussion has gotten beyond "how do we file our tax return" and has gotten into legal questions. I am not a lawyer, and neither is anyone else in this forum, to the best of my knowledge. We can't give you legal advice here. So again, your wife and her friend should consult a business lawyer.

[Lisa995]

Just curious....is the "parent company" LuLaRoe and they are selling the clothing line?   I know it requires a large sum up front to acquire inventory. Its very popular around here!

[RJoslyn21]

Yes, it is LuLaRoe.

[Opus 17 · Accepted solution]

Go see a lawyer.  If both have put in a large sum of money but it is only in one person's name, you are ripe for misunderstandings or worse.  Get the partnership nailed down, and do an official partnership tax return.

[Lisa995]

They may be too late to get anything nailed down for 2016.  Couldn't the wife just 1099 the "partner" for half the income, then they split the expenses? Technically not correct, but the outcome would be the same.

[Opus 17]

Well, startup costs must be amortized over 15 years unless they are under $5000 in which case they can be expensed.  If each person put in some money but it was reported as a sole prop by wife with a 1099-MISC for friend, does that allow friend to account for their share of startup? Or does wife expense it all?

Also, it leaves the ownership tangled up, which still needs to be fixed ASAP.

If this is a partnership, regardless of corporate registration, is there a reason they can't still do a 1065?  That would be more correct than a schedule C with 1099 workaround.

[Lisa995]

I feel like the LuLaRoe rep I spoke with said it was $6000 up front for the inventory (you sell directly from your stock).  So not sure you'd consider that "start up costs".

[Opus 17]

Well, if you have to invest a minimum of $6000 in inventory, that's startup costs, unless their gross sales are more than the inventory so they can show a profit.  Presumably the money would work out ok if wife reported all the gross income, half the inventory costs, and 1099-d out half the gross, and then friend reports the 1099 as their gross and half the inventory as their expense.  Or wife reports all the inventory as expenses and then 1099s half the net profit as a subcontractor expense.   I'd still rather see it treated as a partnership rather than as owner-subcontractor.