Contributing assets to a parnership

Discussion in 'Small Business Helper' started by tsbhelper, Oct 7, 2004.

  1. tsbhelper

    tsbhelper Small Business Helper Forum Moderator

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    The following is a question about contributing assets to a partnership which were purchased prior to the formation of the partnership. The poster, Kristopher, tried to post this question on the forum, but apparently had a problem doing so. We are checking this out, but in the meanwhile I am going to post his question here, and the answer, because I think that it is important information for others to know as well.

    Kristopher wrote on 10-07-2004 11:23 AM:

    'm trying to get an answer to a tax question, and I've gone through the process of registering (same as any other forum), but cannot submit a thread. Please advise.

    The tax question is as such. I bought equipment (PC and software) for a new web design business in July. Things evolved, and I need to take time now to register the business (name and such, state, local, federal), get the partnership together, and sign contracts (earning money immediately) before the end of the year.

    Will I be able to write off purchases that I made this year (including PC and software) for the job even though I hadn't solidified a name or filed anything yet?

    Just checking to see how fast I need to move, or whether I can forget about the loss and move at a nominal pace.

    Thank you!
    Kristopher

    Kristopher,

    We have had problems with people posting before. This last week we went in and reset the forum permissions and then tested for a new user to register and post. It worked. Unless somebody else has come back in and reset the permissions, it should have worked for you.

    If you can tell us what the error message or response was that you got when you tried to post, it would be very helpful. We will go back in and test this again as well. Incidentally, the forum is set up so that you are not supposed to have to even register to post.

    Regarding your question....

    Yes you can do this, but if you are setting up a DBA and forming a partnership after you have purchased some capital assets that are to be used in the business, as you may have already guessed, you have a problem.

    These assets are your personal property and will have to be sold to the partnership in order to be recorded on the books. If you were starting up the business as a sole proprietor, this would only be a technicality because you were really in business as yourself before the date you filed, and a DBA is really the same thing as an individual, only the name is different.

    What you will need to do is to "sell" the assets to the partnership in order to record them on the partnership books. The date of this sale would be the book entry date for beginning the depreciation of the assets.

    You should also be aware that there is a special accelerated depreciation method available that will let you immediately depreciate (in effect, expense) a certain dollar value of assets you acquire each year. Last I checked it was somewhere around $15,000 a year, so likely you would be able to expense your entire owner asset contribution this year. Would recommend you do this.

    I am going to post this on the Forums so other people can see it as well.

    The Small Business Helper
     
  2. Kristopher

    Kristopher Guest

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    What if I maintain my personal assets, and allow them to be used by the partnership? I've heard of people being able to write off part of the purchase for these assets seeing as the partnership uses them.

    Also, would a partneship be the best option for a venture like this? I've looked at LLC's and Incorporating, but I don't believe I have the money to go in that direction. I'll be working with three other individuals, and we will be starting this business together.

    I am going to talk to my local SCORE group, and get some personal advice after I formulate the business plan. That will enlighten me to a lot of the questions I'm posing here, but it's nice to have some of the information and answers up front.

    Thank you for all of your assistance.
     
  3. tsbhelper

    tsbhelper Small Business Helper Forum Moderator

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    Kristopher,

    Glad to see you were finally able to get online here. SCORE is a good idea. Since I am at least semi-retired, have had some thoughts about volunteering my services to them, but for the time being I'm going to keep on with this concept until we see how it works out.

    An LLC or an S-type corporation is a fairly large amount of paperwork and hassle. If you are not already accounting oriented and able to do this mostly on your own, or not interested in spending a fairly substantial sum on accounting and legal fees, would not recommend this for a small business startup.

    If you read the EMPLOYEE section of the Small Business Helper, my opinion about partnerships is already on record there, but let me restate it here.

    Partnerships have many of the same characteristics and problems of marriages. Adding additional partners tends to increase those problems. Usually things start out OK, but begin to go sour around the six month mark. Been there, done that, don't recommend it. Divorce is messy, and the dissolution of a partnership is very similar.

    The Small Business Helper
     
  4. Kristopher

    Kristopher Guest

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    I am setting up a meeting with SCORE later this week. Having a personal chat may help clear some of the questions and doubts I've been having.

    We actually have (luckily) an accountant and lawyer who are willing to help us get started at an extremely low rate. My preference thus far is to go with an LLC. I've completely dashed the idea of a partnership, but the idea of going as a sole proprietorship with paid contractors didn't appeal to my the rest of the small group. I also am a bit hesitant about taking on the risk all by my lonesome. I'll update this thread with what I've found out for informational purposes.

    Thank you again!
     
  5. Kristopher

    Kristopher Guest

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    We spoke with a member of SCORE, and the suggestions were as follows (for a web design company starting out):

    -Don't even THINK about a partneship. There is too much at stake, like your cars, homes, expensive equipment, etc... You are liable.

    -An LLC is the best option, but not something you can start up right away.

    -Suggested for us to take on jobs, complete them, and have someone file them with their taxes as an independent small business (all earnings go back into the company). Once we make a name for ourselves and have a decent portfolio, then think about forming an LLC. Remember though, folks, it's extremely difficult to do without a lawyer and CPA.

    So, that's what we're going to do. The details of how the taxing will work will be handled by this particular member (who is kind enough to offer his free consultation). I think we're off to a good start.
     
  6. Kristopher

    Kristopher Guest

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    Oh, and about the assets. We were told that all of that would be taken care of whith the formation of the LLC. They are durable goods that will have depreciated in value by then, but will be viable tools for our business.
     
  7. tsbhelper

    tsbhelper Small Business Helper Forum Moderator

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    Kristopher,

    In general I agree with what you have been told. In effect you will starting up a small business at the simplest and most basic level, thus minimizing the paperwork and complication of doing business. This would involve applying for a DBA, opening up a bank account, and starting up a set of books to keep track of income, expense, and profit.

    The idea of having a third party who was not originally involved in the idea and would not ordinarily be considered a "partner" step in and volunteer to take this on is quite extraordinary. Am not sure if this is one of the SCORE team you are referring to, or the accountant that you previously referred to.

    Whoever that person is, you will be trusting him with control of the business, and the power to either approve or disapprove of any financial decisions you will be making. Unlike the controller or chief financial officer of a corporation, he will not be answerable to anyone within the business structure, because legally, he IS the business structure.

    It is my sad experience that when you give someone this sort of power, they almost always use it as a lever to control the business so that it is run the way they think it ought to be. This has happened to me... except that I was the one who became the dba/sole proprietor, and subsequently took control of the business.

    As far as what you have been advised... and are planning to do, this is the only fly in the ointment I see... but it is a rather large fly and the ointment is very, very sticky. Think well on this before you decide to go ahead.

    The Small Business Helper
     

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