How do I avoid forming a general partnership while splitting income 50-50 with someone else?

Question

You can see a lot of context by reading here: Every month I make money from Patreon. I want to split my income with a partner. How do I avoid paying taxes on 100% of the income?

I don't have an LLC (yet?), and for simplicity, I think I want to avoid making it for now (and possibly in the future). I have a partner (the artist) and I have agreed to share the profits 50-50. My interpretation is, simply by saying this somewhere on the Internet, I have accidentally formed a general partnership. That is not something I want to do. I want my taxes to be simple, where I can file a schedule C and send the artist a 1099-NEC at the end of the year, or ideally, something even simpler.

How can I avoid forming a general partnership? My partner is totally fine working for me as a contractor (although I'd still be splitting income 50-50). I know she has no interest in forming an LLC either. In fact, the effort involved is probably enough to make her not want to work with me at all.

Answer 1

The general partnership is the default: If you found a business with someone, without consulting a layer or writing up a contract, then it's a general partnership.

You avoid that by just not calling it a business. Your artist writes you a bill. You pay. By not treating it as a business that you have together with the artist, but instead treating it as a "you buy art from the artist" relationship, that's what it becomes by law, too.

The artist can sell the art for 50% of the profits, that's fine. That's just part of the sales contract you have with the artist. You don't need an actual contract either, your agreement with the artist, however you reached it, should count. The only reason you would need a contract with the artist is if either of you didn't trust the other and wanted to keep open the possibility to sue.

Side note: "LLC" means "Limited liability company", is not the same as a General Partnership and you don't get one by accident - this is a formal thing and you need to fill out forms and pay fees if you want it. You can have one by yourself to protect yourself from liability, and that might be a good idea, but someone mentioned it costs at least $800 in taxes per year in California, so you would need to research the specific terms in your state and weigh up the pros and cons.

Answer 2

EDIT 2: Make sure they sign the contract before moving further. This will help to leave out any confusion or legal issues. In theory, they could claim you agreed to something else and threaten to take you to court. They could also say they only had to do one small thing to get 50% not all the artwork.

In case your question was not answered yet, My "simple answer" is to have them be and treat them as a 'contractor'. They are helping you make a game, but they can do any other gaming projects on the side at the same time if they wish. For more info on contractor rules you can view the IRS website.

The way that would work is to have a contract written up with part of it saying you are the the owner of the game hiring them to help you make it. List what they will do and mention they will be paid 50% of all profits for this game if that is your goal. Also mention when he will be paid (once a month/week). Basically flesh out all the key little details and have all those details in the contract. Money you pay him will be expenses and his money will be income to him. You will need to provide them a 1099 form for them if I remember correctly. Unless you make an LLC your social security number would go on this form so an LLC may be the preferred method.

Each state can be different so that will be something to look into. However, it is possible to fill out the LLC yourself if you absolutely do not want to hire another company for that (it is relatively simple). In Florida it is about $137 each year. You do not pay any additional taxes then what you would have to pay regardless as a business owner (besides that filing fee to keep the LLC active) There are no additional taxes to be paid(in Florida at least). I do not know your state and we would charge to do such research for another state. And then you would also want to get EIN through the IRS so you can start using that on business forms instead of your social security number.

For federal taxes, you would be filling out a Schedule C since you would be considered a pass thru entity. Only you will have your name on the LLC. The person you are working with will not be mentioned when filling out this form or registering for an LLC.

IMPORTANT: With an LLC you must keep your business and personal transactions separate. You will want a separate bank account from your personal expenses if you do go this route at all. This allows you to keep some of the protections that an LLC provides.

EDIT: I saw another question you asked. You can deduct your expenses and not pay taxes on the full 100% that comes in from Patreon. The Schedule C for LLC forms explain how you need to categorize your expenses.

Disclaimer: We help businesses start and maintain their company as business consultants providing business and website services; we are not lawyers, and this is only our advice.

Answer 3

OP, as has now been said many, many, many times, it is honestly this simple:

1. Patreon will send $720 to your bank account.

2. You now send $360 to the other person's bank account.

Honest to God -

That is all there is to it!

The other person does not even have to send you an invoice. the IRS, DOJ, your Mom, nobody cares about invoices.

You just do that each month.

How you do your taxes

When you use taxact.com or the others to do your taxes, you tick "self-employed".

When you do that, there's a slot where you type in "gross income", you'd enter $720. There's a slot where you type in "expenses", you'd enter $410. (So, you paid $50 for office supplies, and the $360 above = $410.)^†

• That's it.

• That's all there is to it.

• There are no further details.

• There's nothing else to do, think about, know, or consider.

• This happens constantly and millions of times a year with 16 million people.^†† It's a total non-issue.

• There is no "partnership", "LLC", "St Nevis Holding Corp", "Accounting", "Accountant", "Agreement", "Contract" or anything else, whatsoever, involved.

It is, honestly, That Simple.

I (for example) have done this dozens of times. Noite that there are some 4? million apps on the appstore, at least 300,000 of them make more than a couple thousand bucks a year, and of those 300,000, 99.999% are handled as I say above. It's a total non-issue.

How does Colleague do their taxes?

The $360 is "gross income" - that's it.

Could someone be ripped off in this?

Sure - you could FAIL to send the $260 to Colleague. But exactly the same thing applies if, incredibly, you had some sort of joint bank account!!!!!!!!!

It happens EVERY DAY that a pair of people doing a business, who have a joint bank account, and, one or the other rips-off the other. There is no solution to that!

What you do is simply, every month one sends the other the half-dollars.

If, one month, that person rips off the other - that's the end of it. What else can you do?

There is no corporate or other structure that can avoid such problems.

You have heard of Facebook of course. (It's like tiktok for incredibly old people!) Facebook is this one group of guys who stole a business idea and formative technology from this other group of guys. All the lawyers and business formulations in the world were involved, but "rip off" still happened. (The original guys got a few dollars in the end, years later.)

---

^† taxact actually has different slots in the web form like "office supplies" "repairs to iphones" etc. in the example, the overall amount is "410".

^†† about 16 million self-employed in the US as of writing.