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We just launched a new business and are committing $100,000 in capital to the business. One of the business owners will be providing all the capital while the other will be running the company and will own 50% of the company as well. For tax purposes, since one of the owners didn't contribute capital but instead their expertise, are they subject to taxes? If yes, can the 50% of the company owned by the partner who didn't contribute capital, be treated as a loan instead?
ANSWER
Expert Thomas Graham iii's Answer:
It will be difficult to give a completely accurate answer given several factors that aren't known especially the type of legal business structure. Taxes will incur on the business based on operations. The ownership should be laid out in the partnership agreement. I'm assuming that agreement will lay out that one individual will provide all the capital and the other will manage the business. It will also lay out the earnings/loss ratio based on operations. The breakdown of the earnings will also give you a heads up about the potential tax liability.
No, the second person's equity can't be treated as a loan.
