Partnerships

A partnership is the relationship existing between two or more persons who join to carry on a trade or business. Each person contributes money, property, labor, or skill, and expects to share in the profits and losses of the business.

A partnership must file an annual information return to report the income, deductions, gains, losses etc., from its operations, but it does not pay income tax. Instead, it "passes through" any profits or losses to its partners. Each partner includes his or her share of the partnership's income or loss on his or her tax return.

Partners are not employees and should not be issued a Form W-2. The partnership must furnish copies of Schedule K-1 (Form 1065) to the partners by the date Form 1065 is required to be filed, including extensions.

A partnership is a legally recognized entity between two or more people who agree to contribute money, labor, property, or skills and share in the business profits, losses, and management decisions. There are two types of partnerships—general and limited.

General Partnership: each partner is held personally liable for all debts, taxes, and other claims against the partnership.

Limited Partnership: has both general partners and limited partners. It restricts the amount of personal liability to a limited partner. It allows investors to contribute but will expose them to a limited amount of liability AND management control. A limited partner is only personally liable up to the amount of investment made.

Advantages

1. Simplest form of business for two or more owners
2. Business can be established with minimal formal documentation. It is recommended that partnerships have a formal written agreement with provisions for death, disability, liability, compensation, benefits, and dissolution
3. Profits and losses belong to the partners
4. Partners have freedom to operate the business on behalf of the partnership (i.e., they can hire/fire employees, borrow money, or enter into contracts)
5. No income tax on partnership entity (it’s passed on to individual partners)
6. Buy/sell agreements
7. Availability of resources/skills from all partners
8. Limited liability partners enjoy lower risks

Disadvantages

1. General partners liable for all debts and actions of the partnership (joint and several liability)
2. Limitations apply to raising investor capital (e.g., all investors would be partners)
3. Responsibilities and actions of partners, if not specifically written out, can overlap or contradict one another
4. Partnership income added to other sources of income and taxed at owner’s personal tax rate
5. Complications with taxes arise if fiscal year varies from calendar year
6. Partnership entity lacks perpetual existence in the event of death, disability, or withdrawal of a partner (provisions must be made in advance)

If you are a partnership or a partner (individual) in a partnership use the information in the charts below to help you determine some of the forms that you may be required to file.

Chart 1 (Partnership)

Chart 2 (Individual Partners in a Partnership)

Next:

• Corporations
• S Corporations
• Limited Liability Company (LLC) 

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