Partnership

A partnership is the relationship existing between two or more persons who have joined together to carry on a trade or business for profit. Each person contributes money, property, labor, or skill, and expects to share in the profits and losses of the business. A partnership is a flexible business form because the arrangement is purely consensual. Any individual owner in the partnership may dissolve the partnership at any time and depart with his or her share of the assets. Partnerships, like sole proprietorships, usually have no special state reporting requirements other than tax returns that report the results of the operations.

Each general partner is personally responsible for any partnership obligations that arise during the existence of the partnership. Also, general partners legally have equal abilities to contribute to management decision making. Although partnerships are considered conduits for the purpose of income taxation, they are treated as separate entities under local law. Thus, partnerships can transact business and own property in their names, separate from the partners. This characteristic is a major difference sole proprietorships and partnerships.

A partnership is not a taxable entity. However, it must figure its profits or loss and file a return, Form 1065, U.S. Partnership Return of Income. Capital gains (losses) are determined at the partnership level and distributed to the individual partners according to the applicable distribution percentages. The partners report their distributed share of capital gains on their individual Schedule D, Form 1040.

For income tax purposes, the term partnership includes a syndicate, group, pool, joint venture, qualified limited liability company or unincorporated organization that is carrying on a business and that may not be classified as a trust, estate, or corporation. Factors used to determine if the parties intend to carry on a partnership include:

  1. The parties' conduct in carrying out the provisions of the partnership agreement,
  2. The testimony of disinterested persons,
  3. The relationship of the parties,
  4. The abilities and contributions of each, and
  5. The control each owner has over the partnership income and the purpose for which the income is used.

A joint undertaking merely to share expenses is not a partnership. Mere co-ownership of property that is maintained and leased or rented does not necessarily constitute a partnership. However, if the co-owners provide services to the tenants, a partnership exists.

The partnership agreement includes the original agreement and any modifications of it agreed to by all the partners or adopted in any other manner provided by the partnership agreement. The agreement or modifications may be oral or written. Generally, a partner's share of income, gain, loss, deductions, or credits is determined by the partnership agreement.