For the last installment in our series on the tax treatment of entity types we’re going to cover the Partnership. If you’ve been keeping up with our posts, this will seem eerily familiar. Why? Because the LLC is typically treated just like a Partnership!

The four considerations we’ve been covering are:

  1. Pass through of gains
  2. Pass through of losses
  3. Transfer of assets to the entity, and
  4. Transfer of assets from the entity

Today we will cover the Partnership. Before we get into the four considerations, it is important to discuss the legal treatment of a Partnership. A Partnership is simply an agreement between two or more people who share an interest in the same business. From a legal standpoint, courts will rely on any agreement, formal or not. Two people merely splitting costs and sharing profits in a venture is enough. Typically, this isn’t an issue, until it is. Additionally, a Partnership does not provide any liability protection. For more information on limiting liability, see here.

As for the tax considerations;

1. Pass through of gains

The default treatment of a Partnership passes gains through to a shareholder’s personal income statement. With a Partnership, there is no entity- only partners. All profits and losses of the Partnership are passed directly to the partners. This can mean that even when no profits are paid out to the partners, the partners are still personally liable for their share of the taxes on those profits (this is true of the LLC as well). A member of an LLC or a Partnership can contract with the other members as to how the gains are allocated and distributed to the shareholders.

2. Pass through of losses

Again, the default treatment of a Partnership is to pass through any losses to a shareholder’s personal income statement. Losses can be allocated according to the terms of the Partnership.

3. Transfer of assets to the entity

The transfer of assets to a Partnership is not a taxable event, regardless of the amount of control owned by the partner transferring the assets. This could potentially make starting your new company less expensive than with other entity types, especially when there are multiple shareholders. While a Partnership is easy to form, and can easily be given assets, it does not protect the partners from limited liability.

4. Transfer of assets from the entity to partners

When a Partnership decides to transfer assets to a partner, this event is not usually taxable. Either upon distribution or liquidation a partner is responsible for the taxes, if any have even arisen.

Overall, a Partnership is a tax efficient way to get your company started, but lacks the limited liability of other entity choices. In most cases there will not be a tax on transferring assets to and from the company. There is also no double taxation of profits, thus saving the shareholders money. Additionally, if there is a loss, a partner may benefit from a tax reduction.

A Partnership is an easy way to setup a business and has beneficial tax treatment, but does not have the benefit of limited liability. If you’re considering a Partnership, also consider an LLC. They have very similar tax treatment, and only a few formal requirements to set up! Learn more here.

Deborah Sweeney

Deborah Sweeney is an advocate for protecting personal and business assets for business owners and entrepreneurs. With extensive experience in the field of corporate and intellectual property law, Deborah provides insightful commentary on the benefits of incorporation and trademark registration. Education: Deborah received her Juris Doctor and Master of Business Administration degrees from Pepperdine University, and has served as an adjunct professor at the University of West Los Angeles and San Fernando School of Law in corporate and intellectual property law. Experience: After becoming a partner at LA-based law firm, Michel & Robinson, she became an in-house attorney for MyCorporation, formerly a division in Intuit. She took the company private in 2009 and after 10 years of entrepreneurship sold the company to Deluxe Corporation. Deborah is also well-recognized for her written work online as a contributing writer with some of the top business and entrepreneurial blogging sites including Forbes, Business Insider, SCORE, and Fox Business, among others. Fun facts/Other pursuits: Originally from Southern California, Deborah enjoys spending time with her husband and two sons, Benjamin and Christopher, and practicing Pilates. Deborah believes in the importance of family and credits the entrepreneurial business model for giving her the flexibility to enjoy both a career and motherhood. Deborah, and MyCorporation, have previously been honored by the San Fernando Valley Business Journal’s List of the Valley’s Largest Women-Owned Businesses in 2012. MyCorporation received the Stevie Award for Best Women-Owned Business in 2011.

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