No Whitewashing This Taxing Issue

Can back taxes stop a painter forming a partnership with a friend? Not if he insulates their new business from his own existing debts

By Karen E. Klein

Q: My husband owns a small painting business and wants to go into partnership with a friend. I'm concerned, however, because there are back taxes owing on our business. Is it wise to get involved in a partnership when we have this tax liability? -- M.E., San Francisco


When an entrepreneur considers entering into a partnership, serious thought is always required. And when you choose a business partner, the saying goes, take twice as much care as you would when choosing a spouse: After all, a spouse can only claim half of what you own, whereas a partner could take you for everything!

If your husband currently runs the painting business as a sole proprietorship and decides to go into business with his buddy, they should start a new business entity structured as a legal partnership, advises CPA Danielle M. Hewitt, of Keyhan Hewitt Accountancy and the Invisible Accountant. That way, each would contribute a certain amount of cash and/or assets to the partnership, and the back taxes incurred when the business was a sole proprietorship would not be the responsibility of the newly formed outfit.

"That is what I would demand if I were a partner coming in to this situation," Hewitt says. "You and your husband will be responsible for sorting out the previous back taxes of the sole proprietorship with your own financial resources, and you would not use resources of the newly formed partnership to pay them." Hope that helps!

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