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Partnership
Of all the choices you make when starting a business, a partnership is the type of legal structure you select for your company. Not only will this decision have an impact on how much you pay in taxes – it also affects the amount of paperwork your business is required to do, the personal liability you face, and your ability to raise money.
- A partnership is an entity owned by two or more people for a trade or business. Each person contributes money, property, labor or skill, and shares in the profits and losses of the business.
- A partnership does not pay tax at the partnership level but instead passes through the income, deductions, gains, losses, etc., from its operations to its partners. Each partner reports their share of the partnership’s income or loss on their tax return.
- Partners are not employees and do not receive a W-2 from the partnership.
Partnerships are highly flexible, with the terms of the partnership outlined in the partnership agreement. Included in the partnership agreement will be the per partner allocation of income and losses.
A partner can be either a general partner or a limited partner. The general partner manages the day-to-day operations of the business. Each partnership must have at least one general partner.
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General partners are subject to income tax and self-employment tax based on their percentage of income from the partnership.
General partners may also be personally liable for the debt of the partnership and their other partners.
Limited partners are investors in the partnership and are not subject to self-employment tax but to income tax on the business’s net profit. Limited partners typically are not liable for the debts of the business.
Some partnership agreements may include guaranteed payments to certain partners based on services provided or capital invested. Guaranteed payments are subject to self-employment tax to the partner that receives them, even for limited partners.
Requirements
To form the partnership, you will prepare a partnership agreement and other legal documents.
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