Basic Training: Q is for Quagmires and Family Businesses

Posted on August 8, 2014 in Business Partners

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Few business partnership situations are as unpleasant as those involving family members. If you “kick the bum out,” will your brother run to Mommy and rat on you? Will you be able to show your face at Thanksgiving dinner if you’ve won the company but lost your family’s support?

Here’s today’s quandary:

Q.: My brother and I are 50 percent partners in an S-Corp. I incur 80 percent of the expenses, which I pay out of pocket. My partner incurs 20 percent. However, because of the 50 percent partnership, my partner insists on taking 50 percent of the deductions. As a result my tax burden is very high. Our accountant has suggested that we each calculate our own deductions and that my brother compensate me for the difference. Based on calculated amounts, I actually owe less than a quarter of the taxes I am obligated to pay. Last year I had to borrow to pay off my taxes, as my brother never compensated me for what he owed me.

A.: Generally, 50/50 partners in an S-Corp share the deductions equally; however, they are also supposed to make equal contributions to the business. If one partner is paying a greater share of the expenses out of pocket (why? Is the business not generating enough to cover the expenses?), that partner needs to be reimbursed by either the company or the partner/brother. If neither is happening, then you need to consider seriously whether this business has a future and whether your brother is really the right business partner for you.

Otherwise, as you’ve already noticed, you’ll continue paying taxes on money you haven’t received. Calculating your own deductions won’t get you anywhere if your brother can’t/won’t pay you the difference. Speak to your accountant as to whether your taking a larger salary from the business to recompense you might help from a tax perspective . . . but once again, if the business isn’t generating enough to do that, then you need to take a long, hard look at the prospects.

As for legal recourse, well, there aren’t a lot of options if your brother can’t/won’t reimburse you. You could sue him under your partnership agreement–assuming you have one–although that probably won’t endear you to one another at the Thanksgiving dinner table. You could offer to buy him out of the business (his share shouldn’t be worth very much if the business isn’t generating enough for you to pay your taxes); you could resign from the business; or you could both agree to close it down.

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