Partnership or Scorp?

[kestaxman]

Two Individuals run a business that sells online courses, they are the only two owners and they have no employees. Should they file as a partnership or request scorp status?

[kathyc2]

From your description, I would have a hard time allocating profits to non wages in an S corp. In that case, tax would likely be lower taxed at partnership with 199A deduction. I'm assuming they are an LLC and you are advising on whether to go with default of partnership of submitting S election.

[Jiggers]

Depends. Do they have some type of operating agreement? Are they an LLC?

[kestaxman]

Thanks for your response it was very helpful. One other question about the LLC I described above. You had mentioned it would be hard to for you to allocate profits to non wages if the business chose S-corp status. If there were contractors doing about 20% of the work of the business while the owners did 80%. would that make the allocation of wages and non wages easier/clearer? Or would you say the Partnership is still better because of the number of owners and the benefit of the 199A deduction?

[kathyc2]

It depends on the circumstances. You just need to run the numbers to see which works out better.

[DaveinTexas]

I would setup a meeting to discuss the roles each person will play in the company. It could be one partner is the super nerd that develops all the website coding to run the site; he works 90 hours a week for the first 3 months, then he is only needed when things go awry (server down, content change, etc). The other partner is the camera guy and loves making the videos for the site (let's say they are selling get rich quick schemes so he is the slick haired fancy $10,000 Italian suit guy). He will work consistently 60 hours a week becuase he is a ham and super conceited. One should be compensated a higher wage than the other, but you won't know this unless you ask for details. You need to determine these nuances of the business to make a rationale decision. What about health insurance? What do you do if one requires it and the other does not? How do you plan to equalize this? Sometimes the clients will tell you they want nothing to do with payroll report filings, depositing payroll taxes, etc. This would make the choice very simple, Partnership, as long as they have no other employees.

For example, I recently met with a construction company and even though their wages for each partner will exceed the FICA Max (around $150K each), they can still save about $6K to $8K in Medicare tax by electing S Status vs operating as a Partnership. How did we arrive at these wage levels? That is the going rate for an employee; they know because they are head hunted from time to time and they have extensive experience working for other firms doing similar work.

It will become more necessary for some folks to consider electing S Status, especially for some partnerships like the one you mention. As their taxable income rises, the QBI deduction dwindles if no wages are paid (phase-in, phase-out), which could mean a Partnership might limit the QBI. Then, what if a new Administration takes over and repeals/sunsets the QBI?

Spend som time with the figures; do a projection for 2019 to determine the best route, find out what their potential Gross Revenue and Expenses will be, hire a Reasonable Salary company to run a report (I recommend RC Reports), then sit down with the client and charge them for the time.