If you own your eBay business with others and have not incorporated or formed an LLC, then legally and tax-wise, your business is automatically considered to be a general partnership. If you are a partner in a general partnership, you should know the following.
If my eBay business partner defrauds a buyer or runs up a debt, can the buyer or creditor go after me for the money? Yes, each partner is personally liable for any other partner's business debts and legal claims regardless of each partner's ownership interest. In addition, any partner may bind the entire partnership (in other words, the partners) to a contract or business deal.
Does a partnership have to file a separate tax return? Yes. Even though a partnership does not pay its own taxes, it must file an “informational” tax return, IRS Schedule K-1 (Form 1065). In addition, the partnership must give each partner a completed copy of this form showing the proportionate share of profits or losses that each partner must report on an individual 1040 tax return. A partner pays taxes on his or her entire share of eBay profits, even if the partnership chooses to reinvest the profits in the eBay business rather than distributing them to the partners. See IRS tax requirements for partnerships for more information.
What type of paperwork do we need to form a general partnership? You don’t have to pay any fees or prepare any paperwork to form a general partnership; you can start it with a handshake. It makes far more sense, however, to prepare a partnership agreement. Without an agreement, the one-size-fits-all rules of each state’s general partnership laws will apply to your partnership. These rules usually say that profits and losses of the business should be divided equally among the partners (or according to the partner’s capital contributions, in some states), and they impose a long list of other rules. You’ll undoubtedly prefer to make your own rules. Your agreement should cover issues such as division of profits and losses, partnership “draws” (payments in lieu of salary), and the procedure for selling a partnership interest back to the partnership or to an outsider. Form a Partnership: The Complete Legal Guide, by Denis Clifford and Ralph Warner (Nolo), explains how to form a partnership and create a partnership agreement. If you are not comfortable preparing your own agreement, an attorney should be able to prepare one for between $500 and $1,000. Here’s more about partnerships and partnership agreements.
Are my spouse and I a partnership? According to official rules posted at the IRS website, if spouses co-own and run a business in a community property state (Arizona, California, Idaho, Nevada, New Mexico, Texas, Washington, and Wisconsin), they can operate as a sole proprietorship and report their business income as part of the joint return. That makes for a much easier income tax filing. Some tax experts maintain that the rules are the same for non-community property states as well. That is, if spouses co-own the business and file a joint return, the IRS will not question it if they file as a sole proprietorship. Officially, however, if spouses co-own and run a business in a non-community property state, they are supposed to operate as a partnership and file a K-1 partnership return. In all states, if one spouse owns the business and the other works for it, the business is a sole proprietorship, and the owner will have to declare the spouse as an employee or independent contractor. For more rules on employees, see Hiring Help.