When working with a partner on a job that requires both companies to work with a client, is it better to have the client sign the contract with one partner or both? How does this change the tax implications, and is one way going to protect my company better than the other?
Evolve Systems is a small, 10-year-old Web development company located in St. Paul.
"Protect" your company from what? If you mean nonpayment, I suggest getting a retainer with specific payment terms clearly addressed in the contract.
If you mean protection from a lawsuit originated by your client, a separate contract from your company's partner may be beneficial to potentially reduce your company's exposure from any errors, omissions or other harmful actions or inactions of the partner company.
Either way, you should have a business attorney review the contract to make sure the appropriate protections are in place for your specific situation.
The tax implications regarding partnering vs. subcontracting are likely immaterial. The income your company earns is taxed as ordinary income whether it comes from the client or a partner company that hires your company as a subcontractor.
The tax answer is likely still the same if your company is the sole signing contractor and your company hires a subcontractor. However, there may be significant tax ramifications and desired differences between the setups if the domestic production activities deduction is available.
If it is available, or you are unsure, you should have a CPA review the situation and, if needed, you should seek advice on how to structure the contract to best take advantage of the tax break.
About the author
Steven E. Warren,
director of taxation, Lehrman, Flom & Co. PLLP and adjunct professor, University of St. Thomas Opus College of Business