Hiring an employee/partnership?: 1099, W2, pay cash?

Question

I really need direction in businesses. The business that I will describe for you can be any business - it can be an ice cream business, or even an office coffee service business. Forget real estate for one second. Let's pretend this is office coffee we’re talking about.[/b]

The model or structure of the business:

My employee or partner, depending on what you advise, puts no money upfront for equipment or products that are used to sell and generate income. Every time a new account is set up, it will cost me about $600-700 dollars in general. I would pay that amount each time a new account is set up, unless I got a large account with unusuall set up costs involved. He or she, the business partner or employee, gets new accounts by making their own schedule, then sets up with equipment and goods to sell (paper plates, cups, spoons, sugar, coffee, etc.). I won't be getting accounts or visiting the accounts unless there was an emergency like my partner or employee went away on vacation or got really ill. Depending on the number of employees, this business partner or employee would get a $100 bonus for scoring any accounts with a user/customer base of 75 employees or more. After the account gets set up, any profits derived from the business would pay me off first, until I get my money back that I initially invest ($600-700). Now, This would take about 2+ months to get my money back I've invested. Any profits that come in after I am paid off would be split 50/50. They would need to get their own health/life benefits.

Here are the questions:

1. Should I have this person as an employee or would it be better off for the other person (and myself) performing the work to be a part owner? Would they get, say 5 % owership, 49 %, 50%, or should it be ever increasing to increase their drive until they reach a certain percentage (49 to 51 %)?

2. Do I pay this person cash? and if so do I 1099 the person or W2 them?

3. Do I 1099 the person if they are a partner or employee?

4. Same question but for W2?

5. Where do I learn how to 1099/W2 someone? Dumb question I know.

6. Is this an LLC, LLP, S-corp...how do you see it and why?

Exit strategy: Do little work, have someone running the business, and if I ever want to, maybe I can offer an option for my ownership stake or just sell the company off to a bigger company in the same industry to pursue other ventures.

Thanks for your review and input.

Steven Hamilton II · Answer

Uncle Mo,

It sounds to me like you have a lot to think about in regards to the business.

1. Always avoid others having ownership in your business. Your money = your business unless they are providing VERY substantial services. Although it sounds to be as though they basically just stock the shelves. (sounds kind of like the Coca-cola guy who fills the machines). Hire the business partner as a commissioned employee or as an outside commissioned sales person.

2. NEVER pay cash. You can get yourself into serious trouble this way. I'd go the 1099 route since they have incentives to acquire accounts and will incur mileage.

Although if you are providing the transportation from location to location then you may want to consider them an employee.

3. If they are a partner this will depend upon the entity; however, a partner never receives a 1099. They will receive a w-2 if it is a C or S corp(also issue them a k-1). If it is a partnership they will receive only a k-1.

4. See above.

5. I suggest having your accountant take care of everything.

6. The business will be whatever you want it to be. Get your attorney and accountant together to figure everything out.

Exit strategy, sell it off to someone or sell it to one of your salesmen.

-Steven the Tax Guy

Your guide to IRS laws, rules and regulations.

Hiring an employee/partnership?: 1099, W2, pay cash?

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