Partnership
A partnership is the relationship between two or more persons who together carry on a trade or business, with: (1) each person contributing money, property, labor, or skill; and (2) each person expecting to share in the profits and losses of the business.
Advantages
The advantages of a partnership include:
(1) Income is taxed to the partners rather than to the partnership;
(2) Distributed income is not subject to double taxation;
(3) Losses and credits generally pass through to partners;
(4) The liability of limited partners is normally limited, as in a corporation;
(5) There can be more than one class of partnership interests;
(6) Partners can obtain basis for partnership liabilities;
(7) Special allocations are permitted; and
(8) A partnership can be used to transfer value and income within a family group by making family members partners.
Disadvantages
The disadvantages of a partnership include:
(1) The liability of general partners is not limited;
(2) Partners are taxed currently on earnings even if the earnings are not distributed;
(3) Partners cannot exclude certain tax favored fringe benefits from their taxable income;
(4) Partners may be required to file numerous state individual income tax returns for a multistate partnership business; and
(5) In the absence of a business purpose, a partnership must use either a calendar year or the same year as the partners who own a majority of the interests in the partnership.
Partners Taxed as Individuals
While a partnership must figure its total income and file with the IRS a Form 1065 that provides information on the partnership’s income or losses for the year, the partnership itself is not subject to federal income tax. A partnership does not even make estimated tax payments. However, the partners may have to make payments of estimated tax.
The partners are liable for federal income tax on their distributive shares of partnership income in their individual capacities. Guaranteed salary or interest payments are included in income in addition to distributive share income. Thus, the partnership is considered an “aggregate” of the partners, not a separate entity (§701).
A partnership is the relationship between two or more persons who together carry on a trade or business, with: (1) each person contributing money, property, labor, or skill; and (2) each person expecting to share in the profits and losses of the business.
Advantages
The advantages of a partnership include:
(1) Income is taxed to the partners rather than to the partnership;
(2) Distributed income is not subject to double taxation;
(3) Losses and credits generally pass through to partners;
(4) The liability of limited partners is normally limited, as in a corporation;
(5) There can be more than one class of partnership interests;
(6) Partners can obtain basis for partnership liabilities;
(7) Special allocations are permitted; and
(8) A partnership can be used to transfer value and income within a family group by making family members partners.
Disadvantages
The disadvantages of a partnership include:
(1) The liability of general partners is not limited;
(2) Partners are taxed currently on earnings even if the earnings are not distributed;
(3) Partners cannot exclude certain tax favored fringe benefits from their taxable income;
(4) Partners may be required to file numerous state individual income tax returns for a multistate partnership business; and
(5) In the absence of a business purpose, a partnership must use either a calendar year or the same year as the partners who own a majority of the interests in the partnership.
Partners Taxed as Individuals
While a partnership must figure its total income and file with the IRS a Form 1065 that provides information on the partnership’s income or losses for the year, the partnership itself is not subject to federal income tax. A partnership does not even make estimated tax payments. However, the partners may have to make payments of estimated tax.
The partners are liable for federal income tax on their distributive shares of partnership income in their individual capacities. Guaranteed salary or interest payments are included in income in addition to distributive share income. Thus, the partnership is considered an “aggregate” of the partners, not a separate entity (§701).