Alright, I have a unique situation come up that I need to figure out and it is a bit outside my expertise. Given the diverse background here I'm hoping some of you may either have experience with this and/or have some ideas.
In this hypothetical, let's say one person is going to take over a business with zero start up costs and become the owner ("Owner"). This business is however dependent on two other individuals for viability, almost entirely ("Partners"). Now assume Owner has agreed to take 20% of net profits, and Partners are to get 80% of net profits. However, there is a huge limitation - the Partners cannot be owners of the business, nor be given money directly from the profits of the business. Assume for legitimate reasons. But as I said before the business cannot be profitable without the Partners' efforts.
Further assumptions:
- Trust is not in question here. All individuals have full trust in each other.
- All tax issues will be taken care of. Meaning the income tax will be paid and then the redistributions made.
So the question becomes, how can the Owner legitimately filter those 80% of profits to the Partners? The main goal here is to create a disconnect between the business and the Partners in terms of the profits. Some ideas I've had and some of their limitations I will lay out:
1. Partners give Owner a large loan with high interest/penalties, and Owner repays the profits through the loan. PROBLEM - you will have to show the initial transfer of money so this may not work, and you will have to show Owner using that money to buy the business.
2. Partners are consultants to the business and get a high salary. PROBLEM - odd to have two partners, the business really does not depend on their expertise in this field, but rather their contacts. Would look shady. Limitation on how much can pay in consultant fees in case profits skyrocketed.
3. Owner takes all profits, pays all taxes. Net goes into personal account. Partners form an LLC for purposes of investment in property. Owner then lends the equivalent due to Partners as loan to LLC for investment, and then forgives the loan later on. So far, my best plan.
4. Owner takes all profits, pays all taxes. Net goes into personal account. Partners and Owner form an LLC to purchase property for investment. In LLC agreement, Owner contributes money, Partners do all the work. Owner contributes the equivalent due to Partners to the LLC, property is bought, later sold and Partners take the money as compensation for their "work."
5. Owner takes all profits, pays all taxes. Net goes into personal account. Owner then gives major gifts to Partners. Cars, trust accounts for kids, payment of college tuition, etc.
So far all I have thought of. Anyone have any experience or suggestions on this? All thoughts are welcome...
*Please note this is just a hypothetical and no laws are being broken or contemplated to be broken.
In this hypothetical, let's say one person is going to take over a business with zero start up costs and become the owner ("Owner"). This business is however dependent on two other individuals for viability, almost entirely ("Partners"). Now assume Owner has agreed to take 20% of net profits, and Partners are to get 80% of net profits. However, there is a huge limitation - the Partners cannot be owners of the business, nor be given money directly from the profits of the business. Assume for legitimate reasons. But as I said before the business cannot be profitable without the Partners' efforts.
Further assumptions:
- Trust is not in question here. All individuals have full trust in each other.
- All tax issues will be taken care of. Meaning the income tax will be paid and then the redistributions made.
So the question becomes, how can the Owner legitimately filter those 80% of profits to the Partners? The main goal here is to create a disconnect between the business and the Partners in terms of the profits. Some ideas I've had and some of their limitations I will lay out:
1. Partners give Owner a large loan with high interest/penalties, and Owner repays the profits through the loan. PROBLEM - you will have to show the initial transfer of money so this may not work, and you will have to show Owner using that money to buy the business.
2. Partners are consultants to the business and get a high salary. PROBLEM - odd to have two partners, the business really does not depend on their expertise in this field, but rather their contacts. Would look shady. Limitation on how much can pay in consultant fees in case profits skyrocketed.
3. Owner takes all profits, pays all taxes. Net goes into personal account. Partners form an LLC for purposes of investment in property. Owner then lends the equivalent due to Partners as loan to LLC for investment, and then forgives the loan later on. So far, my best plan.
4. Owner takes all profits, pays all taxes. Net goes into personal account. Partners and Owner form an LLC to purchase property for investment. In LLC agreement, Owner contributes money, Partners do all the work. Owner contributes the equivalent due to Partners to the LLC, property is bought, later sold and Partners take the money as compensation for their "work."
5. Owner takes all profits, pays all taxes. Net goes into personal account. Owner then gives major gifts to Partners. Cars, trust accounts for kids, payment of college tuition, etc.
So far all I have thought of. Anyone have any experience or suggestions on this? All thoughts are welcome...
*Please note this is just a hypothetical and no laws are being broken or contemplated to be broken.