Partnership Description

A partnership consists of two or more owners and functions as a trade or business.  A joint undertaking merely to share expenses does not necessarily constitute a partnership.  An limited liability company with two or more members is generally classified as a partnership for tax purposes.

Partnership Tax Election

Partnership income and expenses flow through to the partners in  partnership tax election.  Income is taxed to the partners whether or not it is distributed.  Pass-through items retain the same character in the partners as they had in the partnership.

Wages & Self Employment Tax

A general partner’s share of business income (including guaranteed payments) is subject to self employment tax.  A limited partner’s share of business income is not subject to self employment tax unless the partner performs services for the partnership.  Other items, such as interest and dividends, retain their character and are passed through to the individual partner’s income tax return.

Business Losses

Business losses flow through to partners.  Recognition of loss by a partner is limited by the partner’s basis, at-risk rules and passive activity rules.

Bookkeeping & Accounting

Depending on income and assets, the partnership may be required to include a balance sheet with its income tax return.  Therefore, the partnership should use the double-entry bookkeeping method.  If a partner exchanges property other than cash in exchange for an interest in a partnership, special accounting rules apply.

Transfer of Ownership

The partnership agreement may restrict the sale of a partnership interest, and may control the terms of the sale.

Partnership tax election considerations include the number of individuals involved in the business, and the advantages and disadvantages inherent in the type of entity.

Business Advantages

  • A partnership combines the skills and/or financial abilities of several people
  • Easy to establish even though a Partnership Agreement can become very complex
  • Business usually benefits from partners who have complimentary skills

Business Disadvantages

  • It is easy to get into a partnership but often hard to get out of one
  • General partners are liable for actions of the other partners – unlimited liabilit
  • Sharing of profits
  • Disagreements in decision making

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