Partnership

A partnership is an unincorporated business entity which has at least two partners (but can have more). Like a Sole Proprietorship a Partnership under the eyes of the law is not a separate legal entity from its owners, in that partners are financially and legally liable for business debts and lawsuits. It is worth mentioning that U.S. courts have recognized partnerships as separate business “entities” separate from their owners. Partnerships are formed through agreements between partners, called a “Partnership Agreement”. The purpose of a partnership agreement is to outline the roles of each partner in the business and their ownership. Like “LLCs”, Partnerships are “pass through” entities, meaning the partnership doesn’t pay any income taxes, but rather “passes” the profits and losses through to the partners (according to their ownership stake), who then report the income or loss on their “Business Income” section of their return.

Features of a Partnership:

  • Created by agreement, proof of existence and estoppel.
  • Formed by two or more persons
  • The owners are all personally liable for any legal actions and debts the company may face.
  • Not a separate tax entity

Filing Taxes as a Partnership:

Like an LLC, Partnerships are “Pass through” entities, which means the partnership itself won’t pay any taxes directly. Instead the profits and losses are “passed” to the owners, who must report them on their own tax return as “Business Income”. Like an LLC, Partnerships do have to file a business tax return which outlines revenues and expenses using IRS Form 1065 and after completing form 1065, Schedule K-1 (Form 1065) must be created and sent to each partner.

Advantages of a Partnership

  • No fees to create a partnership – just create an operating agreement with your partners and sign it.

Disadvantages of a Partnership

  • Unlike a Sole Proprietorship, partnerships need to file a tax return using form 1065 and issue K-1s to partners (The same way LLCs do).
  • Does not have the “Limited Liability” protection that LLCs have

Further Reading:

IRS Partnership Tax Information
Wikipedia General Partnership Page

 

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