Consider carefully whether you would want to "partner" with someone whose work performance, sales skills, etc., you might not know enough about. Generally, a partner has equity in the partnership, the right to receive a percentage of profit, and to vote on certain partnership matters. While the relations between partners can often be addressed in a partnership agreement. Getting a partner is easy, parting ways with a partner is generally much less easy. As is sometimes said, "A partnership is like marriage, but without love."
Employment relations carry a good number of administrative burdens in withholding federal and state income taxes, social security tax, medicare, and federal and state employment security insurance, and other types of filings. With regard to the latter taxes, often called "payroll" taxes, half are withheld from the employee`s pay by the employer and paid into governmental taxing authorities and the other half are paid directly by the employer. Also, different federal and state laws apply depending on the number of employees.
Independent contractors generally pay their own taxes. While the simplicity of using independent contractors is appealing, people often make the mistake of thinking that as long as the parties involved agree that the relationship is one of an independent contractor and principal (employing party) that it therefore is one. Taxing authorities generally could care less what the parties want to call their relationship, they look at the underlying facts. The IRS historically has used a 20 point list of criteria for a "balancing test" to determine whether a relationship is on balance more indicative of an employee-employer or independent contractor-principal relationship, i.e. employees generally get paid by the hour or on salary, independent contractors generally get paid by work performed; employees generally use the equipment of the employer, independent contracts do not; employees generally provide services to only one employer, independent contractors generally provide their services to others, etc.
Also, the IRS will also make a determination of the nature of the relationship if you submit a request on IRS Form SS-8.
It is best to communicate with a qualified attorney licensed in your state and/or a CPA to confirm whether the relationship is one or the other. A person is usually well advised to reduce the terms and conditions of the relationship, whichever it is, to a properly written agreement.
SmallBusinessLawyer8/1/2009 7:35 PM
Attorney at Law
Small Business Law Firm of Payne & Associates, LLC
I am not your attorney. You are not my client. This is not legal advice. Any information provided is for educational purposes only. For legal advice, see an attorney licensed in your state familar with your specific circumstances.