Partnership or S Corp?
I am opening an art gallery and pottery studio with another artist. Currently, we are both sole proprietors of our own arts businesses. My question is, Should we set up the gallery as a partnership or as an S corporation? And should each of us set up our own business independently, because we will both continue to sell our own work outside the gallery? I am concerned about protecting personal assets in case of a lawsuit. My partner is concerned about taxes. We've gotten conflicting advice from the attorney and the CPA we have spoken with.
—Grace E. Calleja, owner, PotteryByGrace.com, Key West, Florida
There are two rules to keep in mind when setting up a partnership. The first: You never know what somebody is like until you've worked with the person for a few years. The second: The more complicated you make the partnership structure at the outset, the more difficult it is to unravel if things don't work out.
A corporation does offer extra protections against personal liability, but it wasn't clear that such protections were needed in this case. The two artists had already signed a lease on the space for their new store. Because they had signed as individuals--rather than as a corporation--they are "jointly and severally" liable for it. In other words, if they default, they're both on the hook whether or not they incorporate. And a default on the lease is probably their biggest potential liability. They can buy insurance to protect themselves against other potential liabilities.
In any case, they need some professional advice. Grace told me that her partner's husband, a CPA, thought they should have a limited liability corporation for tax purposes. While I don't doubt his good intentions, I told her she should retain her own, independent counsel.
I also said that she and her friend should be careful not to overlook the important business questions in setting up their partnership. They need to be clear that those commitments are limited to the store and have no bearing on any other business each of them may do. Grace told me they had already agreed that they would both be free to do whatever they want to do outside the gallery/studio--a fact that should be spelled out in the documents they sign. As for incorporating individually, I didn't see any reason for them to do it at this point. It would just add an unnecessary layer of complexity to the relationship, and complexity ought to be avoided. So should formal commitments to each other that could hinder them in the future if they decide to part ways.
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