You may need a tax advisor for your partnership business. This should be either a CPA or a tax attorney who has significant experience with small businesses. Tax problems can cause problems for your business, so you need someone who is knowledgeable and keeps up-to-date with the changes in the tax code. This section will give you some basic ideas regarding taxes, but it will not substitute for a tax professional.

Federal Taxes

For federal income tax purposes, you will pay taxes on your share of the profits of the partnership. This will be reported on an IRS Form 1065. The partnership itself is not taxed. Instead, the distributed partnership income of each partner is taxed to that partner. The partnership will need to file a partnership tax return for informational purposes, but no tax will be paid.

Each partner will report his or her share of the distributed income on his or her individual tax return, and pay any tax that may be due. Exactly what is considered distributed to each partner is a matter of tax law and IRS rules. It may even include money kept by the partnership after all expenses are paid.

State Taxes

There may also be state tax laws to deal with. These can include such things as income taxes, inventory taxes, sales or excise taxes, and license and filing fees.

Consulting a Tax Expert

The bottom line is that you would be well advised to consult a tax expert if you want to go into business as a partnership. Even if you would feel comfortable doing your own taxes as a sole proprietorship, there are several reasons that you might not want to do so as a partnership. Although a partnership itself is not taxed and the profits are passed on to the individual partners, there are additional tax forms that must be prepared and filed. Additional calculations must be made to properly allocate the profit or loss between the partners so that they can file their personal tax returns. This can be made more complicated if property is being depreciated.

Mistakes can be costly and interest charges and penalties can put your business at risk. Further, partners are personally liable for partnership debts. Because partnership profits and losses are attributable to the individual partners, the IRS may go after your personal property as well as partnership property.

  • Overview of Businesses and Partnerships
    This section will explain various types of business organizations and help you decide if a partnership is the right form for your business. Types of Business Organizations A partnership is only one type of business organization. There are basically five types of business organizations:
    read more
  • Personal Liability
    To fully understand partnerships, as well as all other types of business entities, it is important to understand the legal concept of personal liability for business obligations. There are always financial risks associated with starting a business. One risk is that the business will fail to make...
    read more
  • General Partnerships
    General partnerships are the most basic type of partnership, and are little more than an agreement between two or more people to run a business. General partnerships have fallen out of favor, being replaced by other types of business structures because they don’t offer liability protection for...
    read more
  • Limited Partnerships
    A limited partnership (LP) is where two or more people own a business, but there are two classes of partners: general partners (who own and operate the business), and limited partners (who invest their money or property in the business, do not have the right to make decisions regarding the...
    read more
  • Limited Liability Partnerships
    A limited liability partnership (LLP) is basically a general partnership, but with the addition of giving the partners at least some limited personal liability. There is only one class of partner (general partners).
    read more
  • Limited Liability Limited Partnerships
    A limited liability limited partnership (LLLP) is a type of partnership that is very similar to a limited liability partnership (LP) in that it has two types of partners, general partners and limited partners. Unlike an LP, however, the general partners in an LLLP have some liability protection....
    read more