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I started an S Corporation for my own business (software contracting and various SaaS products). A friend approached me with a viable idea so we built another application together. They are not an employee nor shareholder of my corporation at this point, but we've been building the new application with my S Corporation as receiving the profits it generates.

What would be the best way to split the profits 50/50, especially if this new application takes off and gets bought?

I would rather not sell them shares of my S corp since the S corp has other profitable projects unrelated to my friend's efforts, so I could see either:

  1. Start a new corporation with the partner and split the equity evenly, or
  2. Treat the partner as an employee or contractor and pay them (w-2 or 1099, respectively)

Since #2 involves much less paperwork, I'm leaning toward that, but am I missing anything?

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1 Answer

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Go with #1 (starting a new company) if there's any chance that this thing will make a profit or get sold. Go through the work now because it'll be a lot easier than when there's more money and emotions involved.

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+1 to start new company. – TimJ♦ Mar 16 '10 at 19:49
Would it be advantageous (or disadvantageous) to have the new corp be partly owned by my original S corp instead of me-as-a-person? Off the top of my head, for example, I could see it being disadvantageous if my original S corp were to be bought/invested before anything happens with this partnered venture. – Crispy Mar 16 '10 at 22:12

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