Retail Industry ATG - Chapter 3: Examination Techniques for Specific
Industries (Direct Sellers)
The majority of direct sellers are sole proprietors who file a Form 1040 Schedule C. A sole proprietorship is an
unincorporated business owned by one individual. It is the simplest type of business organization. The business
does not exist apart from the proprietor (owner). The proprietor assumes the risks of the business to the extent of
all of his/her assets, whether or not the assets are used in the business. Members of a family can be partners.
So, if a husband and wife jointly own and operate a business, a partnership exists.
A partnership is an association of two or more persons to carry on as co-owners a business for profit. Each
person contributes money, property, labor, or skill and expects to share in the profits and losses. For federal
income tax purposes, IRC Sections 761(a) and 7701(a) (2) defines the term “partnership” to include a syndicate,
group, pool, joint venture, or similar organization carrying on a trade or business and not classified as a trust,
estate, or corporation. Whether a partnership exists for tax purposes depends on the parties’ intent, which is
determined by looking at all the facts and circumstances of the business relationship.
Members of a family can be partners. So, a partnership exists if a husband and wife jointly own and operate a
business. In the direct selling business, one spouse often signs up as the company’s representative and the other
spouse “helps” out with the selling, bookkeeping, other duties, and activities. In most instances, the spouse that is
not the registered representative is treated as a non-employee. In other words, they are not paid a salary, nor are
they issued a Form 1099-MISC for their services rendered. Even so, a partnership may exist for tax purposes.
Partnerships generally file a return on Form 1065, U.S. Return of Partnership Income. The return shows the
income and deductions of the partnership, the name and address of each partner, and each partner’s distributive
share of the partnership’s income, gains, losses, deductions, and credits. The Form 1065 is not required until the
first tax year the partnership has income or deductions. In addition, a return is not required for any tax year a
partnership neither receives income nor pays or incurs any expenses treated as deductions or credits for federal
income tax purposes.
Each partner’s distributive share of the partnership’s income, gains, losses, deductions, and credits is reported on
the Schedule K-1 for the Form 1065 and must be included on the partner’s tax return, even if the items being
reported were not distributed.
Unless the direct seller is a limited partner, the distributive share of income from a partnership is self-employment
income. If a husband and wife are partners, they each should report their share of partnership income or loss on a
separate Schedule SE (Form 1040), Self-Employment Tax. Reporting the partnership income on separate
Schedules SE will give each spouse credit for social security earnings, on which retirement benefits are based.
Partnership v. Sole Proprietorship
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