Some Background:

A friend and I have been working on a clothing company together. We have both had similar ventures before, but have only worked solo when doing it.

Now we are splitting it to where I am handling the design/development/brand, and he will be handling the customer service, shipping and logistics. We have an unofficial partnership document that we have both signed (2 physical copies and 1 scanned version in a google drive).

The brand's official start date is in the 2020 fiscal year, so we don't have to worry about it for this tax season, however we want to get ahead of the game and get a game plan put together.

Typical Scenario:

We both live in different cities, so technically this is going to be run from 2 locations, however deductions should only be occurring from his location.

We plan to have the money from purchases going directly to his paypal from shopify (that way paypal will send him a 1099-k and so will shopify.

Our plan is to use the profits of each month to reimburse each members exspenses that paid for. Take this scenario for example:

  1. We print shirts at the start of each month, and we each pitch $300 to the cost of printing.

  2. At the end of the month our total income from sales was $1000.

  3. We would each receive our $300 back, and then split the remaining 400 down the middle.

  4. Then once we've been both reimbursed we will then re-invest money, and repeat the process.

My Question:

If this is how we are planning on conducting the wealth transfer, if he paid me back my cut through paypal as "paying for a goods or service" to where I have to pay taxes, would that be covered as a hobby business?

Or is there a different way to handle this? Seeing as this will be a trial year we want to make sure we can work well together, so we kind of want to avoid going fully official with an LLC and company bank account.

Additionally, on paper, we would be co-owners with a perfect 50/50 split of this venture overall.

  • I don't have the knowledge to answer, but just be careful that if the 1099-k shows as going to him alone, then the IRS may expect him to put that full amount on his own return. Whether you can get to the right answer or not at the end, consider whether you can do anything to make sure he doesn't have audit problems. – Grade 'Eh' Bacon Jan 29 '20 at 19:13
  • Yeah that's a good point and totally makes sense, maybe the solution would be us to both run it separately, as in my hobby business on tax purposes would be the design/dev. But his would be the brand? Obviously just a mental split, so that neither of us seem like were trying to dodge taxes or something – knocked loose Jan 29 '20 at 20:06

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