Selling Partnership Assets on eBay

Q: "I have a computer repair business with my cousin Joe. Just recently I started selling computer parts on eBay, and I've been doing pretty well. Some of these parts come from the inventory of the repair business. I really don't want to share the money from eBay with Cousin Joe. What can I do?"

A: There is a legal term for what you are doing right now: theft. Stop it immediately!

When you are in partnership with someone (as you are right now with your cousin Joe), every asset of the business is owned jointly by the two of you. In other words, you do not own 100 percent of anything, Cousin Joe doesn't own 100 percent of anything—each of you owns 50 percent (or whatever percentage split you and he agreed to when you started the business) of every asset of the partnership, right down to the pencils and paper clips. By taking inventory and selling it on eBay without your cousin Joe's knowledge or approval, you are stealing from the business. If Cousin Joe doesn't mind that you are doing this, then you should be sharing the revenue from your eBay selling fifty-fifty with Cousin Joe (or whatever percentage split you and he agreed to when you started the business).

Also, if a sale on eBay goes bad and you are actually sued by the buyer, your cousin Joe will also be sued, since partners have what we lawyers call joint and several liability—if one goes down, they all go down together. Just imagine explaining to Cousin Joe that he's going to lose his house because of a sideline business you've been running for years behind his back.

If you are making money selling on eBay, make it a partnership business and share the proceeds.

Selling on eBay for a Family Manufacturing Business

Q: "My family runs a manufacturing business in the Philippines. My wife and I, who are U.S. citizens, want to sell our family's products on eBay. Do we have to do this as part of the family business, or can it be separate?"

A: It's usually a good idea for overseas manufacturers to set up a U.S. importing business as a separate legal entity. Since the importing business is subject to U.S. laws, taxes, and regulations, and your family's company in the Philippines presumably does not have a U.S. presence of any kind right now, creating a separate company insulates your family's business from legal and tax liability in the United States.

By setting the U.S. company up as a limited liability company (LLC) or regular C corporation, members of your family who live in the Philippines could become part owners (shareholders of a corporation or members of an LLC) of the company without incurring personal U.S. tax liability (the shareholders of a Subchapter S corporation can be only U.S. citizens or green card holders). The Philippines company could also make an investment in the U.S. business (i.e., purchase shares) in exchange for a percentage of the business's profits and losses. It could also make loans to the U.S. business. You may, however, have to withhold certain taxes on dividends and other distributions of income to business owners who are not resident in the United States (see IRS Publication 515 and Form 1042).

To simplify your accounting and bookkeeping, the U.S. business should be the entity that sells on eBay and should pay all federal and state taxes.

As for how the U.S. company imports goods from the Philippines company, this can be structured in one of two ways: as a sales agency or as a distributorship.

In an agency relationship, the U.S. company would sell the Philippines company's goods on eBay, keep a percentage of the winning bid amount as a sales commission, and remit the balance to the Philippines company, and the Philippines company would ship goods directly to the buyers on eBay (similar to a drop-shipping or consignment arrangement). Title to the goods passes directly from the Philippines company to the ultimate buyer.

In a distributor relationship, the Philippines company would ship the goods to the U.S. company, which would pay a wholesale price for the goods up front. The U.S. company would then warehouse the goods in the United States, sell them on eBay, and keep 100 percent of the proceeds for themselves (similar to a true wholesaler-retailer relationship). Title to the goods passes first from the Philippines company to the U.S. company, then from the U.S. company to the ultimate buyer.

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