Partnership
Authority: IRC §701; Subchapter K
A partnership is a business with two or more owners that is taxed under Subchapter K of the Internal Revenue Code. The partnership files an information return (Form 1065) but pays no federal income tax itself. Each partner receives a Schedule K-1 reporting their share of income, deductions, and credits, which they report on their own returns whether or not cash was actually distributed. Partnerships are the most flexible entity for allocating profits: special allocations are allowed if they have substantial economic effect, and owners can contribute or withdraw property with fewer taxable events than a corporation. General partners and most active LLC members pay self-employment tax on their shares of trade or business income. Multi-member LLCs default to partnership taxation unless they elect otherwise.
Example
Two founders split an LLC 60/40. The business earns $200,000, but only $50,000 is distributed. The 60% partner still reports $120,000 of income on her return via Schedule K-1, because partnership income is taxed as earned, not as distributed.
Related terms
Schedule K-1
Schedule K-1 is the form a pass-through entity issues to each owner reporting that owner's share of the entity's...
Guaranteed Payments
Guaranteed payments are amounts a partnership pays a partner for services or for the use of capital that are...
Limited Liability Company (LLC)
An LLC is a state-law entity that gives its owners a liability shield while leaving federal tax treatment up to an...
Self-Employment Tax
Self-employment tax is how sole proprietors, general partners, and most active LLC members pay Social Security and...
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