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 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.