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A
contract between two or more persons (such as a
corporation and an individual or two individuals) who
agree to pool talent and money and share profits or
losses. Partnerships can be
General or
Limited.
Crucial to the functioning of a Partnership is a
Partnership Agreement. It is strongly advised to draw
up a Partnership Agreement up front with your partners
that addresses all how the organization will be run and
the roles and responsibilities of all partners. This
will eliminate sticky problems down the road.
In terms of asset
protection, general partnerships can be even worse than
sole proprietorships. Anything that one partner does
affects all of the partners, because each partner of the
of the general partnership is personally responsible for
all obligations of the partnership. Thus each general
partner's exposure to risk is increased by a factor
equal to the number of general partners in the business.
TAX:
Partnership taxation is codified as Subchapter K of
Chapter 1 of the U.S. Internal Revenue Code (Title 26 of
the United States Code).
Partnerships are "flow-through" entities for United
States federal income taxation purposes. Flow-through
taxation means that the entity does not pay taxes on its
income. Instead, the owners of the entity pay tax on
their "distributive share" of the entity's taxable
income, even if no funds are distributed by the
partnership to the owners. Federal tax law permits the
owners of the entity to agree how the income of the
entity will be allocated among them.
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
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.
Partnerships are still
required to deposit Employee taxes and pay Federal
Unemployment Tax and deposit Social Security and
Medicare taxes.
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