Band becoming a business. Partnership vs LLC

[riverblindness]

My husband is in a small time band. They rack up lots of expenses. They're thinking of become a business so they can write off deductions and buy a van together, under the band name. I talked with a woman from H & R block. She said we didn't have to be a partnership to get deductions, plus she said we'd have to pay sales tax on shirts and cds we sold and on equiment we owned. I'm not sure if thats right, since i read a partnership is not a taxable entity, maybe shes thinking of a LLC?

My question is. Is it wise for small time band to become a business? If so which is better a partnership or LLC? Plz provide me a detailed answer. I gotta convince 4 guys with all different options which is best. Thanks alot, and if you need more info, i'll answer whatever you want.

 

[army judge]

My husband is in a small time band. They rack up lots of expenses. They're thinking of become a business so they can write off deductions and buy a van together, under the band name. I talked with a woman from H & R block. She said we didn't have to be a partnership to get deductions, plus she said we'd have to pay sales tax on shirts and cds we sold and on equiment we owned. I'm not sure if thats right, since i read a partnership is not a taxable entity, maybe shes thinking of a LLC?

My question is. Is it wise for small time band to become a business? If so which is better a partnership or LLC? Plz provide me a detailed answer. I gotta convince 4 guys with all different options which is best. Thanks alot, and if you need more info, i'll answer whatever you want.

If you want the best answer on this, you should speak with an attorney.
At a minimum, retain an attorney after you have agreed in which direction you want to proceed.

The answer to your question follows!

Partnerships
One big advantage of a general partnership is that you don't have to register with your state and pay an often hefty fee, as you do to establish a corporation or limited liability company. And because a general partnership is normally a " pass through" tax entity (the partners, not the partnership, are taxed unless you specifically elect to be taxed like a corporation) filing income tax returns is easy. Unlike a regular corporation, there is no need to file separate tax returns for the corporate entity and its owners. But given that the business-related acts of one partner legally bind all others, it is essential that you go into business with a partner or partners you completely trust. It is also essential that you prepare a written partnership agreement establishing, among other things, each partner's share of profits or losses, day-to-day duties and what happens if one partner dies or retires.

A major disadvantage of doing business as a general partnership is that all partners are personally liable for business debts and liabilities (for example, a judgment in a lawsuit). While it's true that a good insurance policy can do much to reduce lawsuit worries and that many small, savvy businesses don't have debt problems, it's also true that businesses which face significant risks in either of these areas should probably organize themselves as a corporation or LLC.

LLC
Advantages of LLC (Limited Liability Company)
Much less administrative paperwork and record keeping than a corporation.
Pass-through taxation (i.e., no double taxation), unless the LLC elects to be taxed as a C corporation.
Limited liability, meaning that the owners of the LLC, called "members," are protected from some liability for acts and debts of the LLC, but are still responsible for any debts beyond the fiscal capacity of the entity.
Using default tax classification, profits are taxed personally at the member level, not at the LLC level.
Check-the-box taxation. An LLC can elect to be taxed as a sole proprietor, partnership, S corporation or C corporation, providing much flexibility.
LLCs in some states can be set up with just one natural person involved.
Membership interests of LLCs can be assigned, and the economic benefits of those interests can be separated and assigned, providing the assignee with the economic benefits of distributions of profits/losses (like a partnership), without transferring the title to the membership interest (see, for example, the Virginia and Delaware LLC Acts).
LLCs in most states are treated as entities separate from their members, whereas in other jurisdictions case law has developed deciding LLCs are not considered to have separate juridical standing from their members (see recent D.C. decisions).
Unless the LLC has chosen to be taxed as a corporation, income of the LLC generally retains its character, for instance as capital gains or as foreign sourced income, in the hands of the members.

Disadvantages
Many states, including Alabama, California, Kentucky, New York, Pennsylvania, Tennessee, and Texas, levy a franchise tax or capital values tax on LLCs. (Beginning in 2007, Texas has replaced its franchise tax with a "margin tax".) In essence, this franchise or business privilege tax is the "fee" the LLC pays the state for the benefit of limited liability. The franchise tax can be an amount based on revenue, an amount based on profits, or an amount based on the number of owners or the amount of capital employed in the state, or some combination of those factors, or simply a flat fee, as in Delaware. Effective in Texas for 2007 the franchise tax is replaced with the Texas Business Margin Tax. This is paid as: tax payable = revenues minus some expenses with an apportionment factor. In most states, however, the fee is nominal and only a handful charge a tax comparable to the tax imposed on corporations.
It may be more difficult to raise financial capital for an LLC as investors may be more comfortable investing funds in the better-understood corporate form with a view toward an eventual IPO. One possible solution may be to form a new corporation and merge into it, dissolving the LLC and converting into a corporation.
The LLC form of organization is relatively new, and as such, some states do not fully treat LLCs in the same manner as corporations for liability purposes, instead treating them more as a disregarded entity, meaning an individual operating a business as an LLC may in such a case be treated as operating it as a sole proprietorship, or a group operating as an LLC may be treated as a general partnership, which defeats the purpose of establishing an LLC in the first place, to have limited liability (a sole proprietor has unlimited liability for the business; in the case of a partnership, the partners have joint and several liability, meaning any and all of the partners can be held liable for the business' debts no matter how small their investment or percentage of ownership is).[citation needed]
Although there is no statutory requirement for an operating agreement in most states, members who operate without one may run into problems.
Some people, such as new business people, may not be familiar with the governance of LLCs. Unlike corporations, they are not required to have a board of directors or officers.
The principals of LLCs use many different titles -- e.g., member, manager, managing member, managing director, chief executive officer, president, and partner. As such, it can be difficult to determine who actually has the authority to enter into a contract on the LLC's behalf.
Taxing jurisdictions outside the US are likely to treat a US LLC as a corporation, regardless of its treatment for US tax purposes, for example if a US LLC does business outside the US or a resident of a foreign jurisdiction is a member of a US LLC.
Some creditors will require owners of up-and-starting LLCs to cosign for the LLC's loans, thus making the owners equally liable for the debt as the LLC is, and effectively removing the very purpose of forming an LLC: Limited Liability.
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[eslynne]

Okay, I'm sorry, armyjudge, but that was nearly impossible for me to read.
riverblindness, I'm going to recap (very condensed) and hope this helps.

1. HR Block has great training for people who are going to be preparing basic personal tax returns. Not necessarily business tax training. Not to say that there aren't good business tax preparers from HR Block, because I know some, but that in general, if you want business tax advice, go to a CPA who specializes is new business startup.

2. No, you do not have to be a partnership in order to write off deductions. Income from the band would be (currently, without making any changes) reported on each member's personal tax return on a "Schedule C" and expenses would be also reported on the same schedule. (This would be the income and expenses that each band member personally received and paid out, so if they got $100 for a gig and split it to $25 each, but Adam paid $20 for gas and Bill paid $10 for parking and Charlie bought dinner for $30 and Dave paid $5 for new guitar picks, then
Adams schedule C would say income: $25, auto expenses: $20, net profit $5
Bill's would be income $25 parking expense $10, net profit $15
Charlie's would say income $25 meals expense $15 (because you can only expense 1/2 of meals, but tell the accountant the full amount, because the form will automatically only count 1/2) net profit $10
Dave's will say income $25 supplies expense $5 net profit $20.)

3. If they want to split things up more evenly, or buy things in the name of the partnership, yes, a partnership is good. There are a couple of issues. The partnership will need to file it's own tax return (1065) which will then issue a K1 to each partner with their percent. So using the above example, the partnership's return will say:
Income $100
Auto Expense $20
Parking Expense $10
Meals Expense $15
Supplies Expense $5
Net Profit $50
And each K1 will say $12.50, which will then go onto the personal tax return on Schedule E, income from partnerships.
If you're going to be doing this anyway, it makes sense to go ahead and from an LLC with 4 members, because you have to do the same things, but you do get some additional legal protection with an LLC that a partnership does not, specifically that the partners are all liable for all expenses of the business (if you get sued then the plaintiff can go after all of the members' personal assets - bank accounts, retirement accounts, house, etc) whereas if you have an LLC and you treat it like a company/business (do not mingle personal and business funds, have a separate bank account for the business etc) then they can only go after business assets. For tax purposes you can choose to have it taxed as a partnership (in which case the partnership files the return, gives you K1s, the income goes on your personal returns as described above) or a c-corporation (the business files and pays it's own taxes, but if you get money out of the corporation you get to pay personal tax on it too) or an s-corporation (you get a K1, but you don't have to pay self employment taxes, which you have to pay on any schedule C or partnership income that's over $400 in a year, but you do have to pay employment taxes and give the partners payroll checks - works to your advantage at about $50,000/year income.).

4. Sales tax is due when you make taxable sales no matter what the entity is - so if selling CDs is taxable in Louisiana, it's going to be taxable whether you're a sole proprietor (just selling it yourself), partnership, llc, corporation or anything else. Sales tax is completely different from income tax and they pretty much have nothing to do with each other. So that would be something to look up (or ask that new business startup specializing CPA).

5. In my professional opinion, it is wise to become an LLC taxed as a partnership. This gives you some legal protection, the taxes aren't going to be much different than they would already, and they can jointly own items, such as the van and other equipment.

If anything was unclear, let me know and I'll try to uncondense.

Eslynne