Partnership Taxation
A partnership involves two or more entities (individuals, corporations, trusts, estates, or other partnerships) joining to conduct a business.
Federal Tax Definition:
A partnership includes syndicates, groups, pools, or joint ventures in business. It excludes trusts, estates, qualified joint ventures, and corporations. Insurance companies and tax-exempt organizations cannot be classified as partnerships. A domestic LLC with at least two members is classified as a partnership unless it files Form 8832.
Types of Partnerships:
- General Partnership: Consists of two or more general partners. Creditors can claim both partnership and personal assets. General partners can be personally bankrupted by partnership malpractice judgments.
- Limited Liability Partnership (LLP): Similar to a general partnership but partners are not personally liable for other partners' malpractice. Preferred by large accounting firms.
- Limited Partnership: Used for capital-intensive activities like real estate. Has at least one general partner and multiple limited partners. Only general partners are personally liable.
- Limited Liability Company (LLC): Available in all states and D.C. Combines limited liability with partnership taxation benefits. Members are protected from the entity’s debts. Treated as a partnership for tax purposes.
Tax Concepts:
- Aggregate Concept: Treats the partnership as a channel for income, credits, deductions, and other items to flow to partners.
- Entity Concept: Treats partners and the partnership as separate units, giving the partnership its own tax identity. This is seen in the recognition of capital gain or loss on the sale of the partnership interest.
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