A partnership is a business entity where two or more individuals operate and enterprise or venture to seek a profit. Like S-Corporations, partnerships are “pass through” or “flow through” entities. As such, tax items “pass through” to individuals partners who report their proportionate share on their individual income tax return at the end of the taxable year.
Types of Partnerships
There are at least two main types of partnerships: general partnerships and limited partnerships. A Limited Liability Company (LLC) may also operate as a partnership, but must be registered with the Secretary of State. Depending on the business arrangement, partnerships may include both general partners and limited partners.
Taxation of Partnerships
Of the various business entities, partnerships receive the most flexibility under the Internal Revenue Code. Partners may allocate tax items in any manner they agree upon, provided various rules and regulations are satisfied.
Numerous factors must be considered when determining whether a partnership is the correct form of entity for your business. Some of these factors include:
1) Type of business
2) Capital Structure
3) How partners desire to split profit
4) The level of anticipated income
5) Future growth projections
Unlike S-Corporations, partners may pay more self-employment taxes. S-Corp. shareholders may reduce employment taxes by receiving a portion of profits as a distribution as opposed to a salary. Distributions are not subject to employment taxes. Partners, however, cannot be employees of a partnership. Therefore, partners providing services must report their earnings as income subject to self-employment taxes.
Despite these drawbacks, a partnership may be an ideal option for business in specific industries. Partnerships or LLC’s are particularly useful for real estate ventures with substantial built in gains. This is especially true when liquidating distributions are made.
Speak with Our Tax Attorneys Today!
Consulting with an experienced Tax Attorney is critical in assessing which entity is appropriate for your business. Schedule a consultation with Randhawa Hundal LLP’s Tax Attorneys today and commence business operations with confidence that your affairs are in order.
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