Business Entities According to the IRS: Partnerships

Over the next couple of weeks, this blog will focus on business entities that are recognized by the IRS. Today, we will focus on partnerships. We’ll discuss what a partnership is, what it is taxed at federally, and who benefits the most from filing as a partnership.

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. Therefore, each partner is taxed at their own individual income tax rate.

Limited partnerships have only one general partner with unlimited liability, and all other partners have limited liability. The partners with limited liability also tend to have limited control over the company, which is documented in a partnership agreement. Profits are passed through to personal tax returns, and the general partner, the partner without limited liability, must also pay self-employment taxes. Limited liability partnerships are similar to limited partnerships, but give limited liability to every owner. An LLP protects each partner from debts against the partnership, they won't be responsible for the actions of other partners.

A partnership can be a good choice for businesses with multiple owners, professional groups (i.e attorneys) and groups who want to test their business idea before forming an LLC or corporation. If you have any other questions about whether filing as a partnership is right for you, the professionals at The Center for Financial, Legal and Tax Planning are more than well-equipped to answer your questions. Please contact us at (618) 997-3436.