Tax Services For Partnerships
In Phoenix, Arizona
Professional Tax Preparation For Partnerships
Tax Implications of A Partnership
In simple words, a partnership is a formal arrangement by two or more individuals to run a business and share its profits. The partners may also share the assets, liabilities, and management responsibilities.
A partnership agreement is made for several reasons. Some depend on the business’ goals, some may be because of capital reasons, as it would be easier to raise a specific amount of capital money for a business if it involves more than one individual. Or, other reasons may be because the business requires several specific expertise.
Overview
How To Handle Partnership Taxes
The Three Major Types of a Partnership
- General Partnership – In a general partnership, partners share all assets, profits, and financial and legal liabilities of a partnership-owned business. All partners are subjected to unlimited liabilities including business debts and business management. It is the most popular type of partnership because of the flexible benefits that include; easy to establish, simplified tax implications, and it is easy to dissolve.
- Limited Partnership – Unlike a general partnership where partners are mainly participating in running the business, partners in a limited partnership may have two different types of partners. One, the general partner who has unlimited liabilities and partakes in the daily management of the business. And second, the limited partner who plays zero to a little involvement in the business management. However, a limited partner is also subject to a limited liability to their investment amount in the partnership.
- Limited Liability Partnership or LLP – LLP is commonly used by professionals such as accountants, lawyers, and doctors who go into practice together. The limited liability partnership provides certain liability protection including reducing the liability for the actions of other partners, along with some potential tax breaks and other advantages.
Partnership Taxation
Generally, a partnership is not subjected to federal income taxation by the IRS, they are considered a “pass-through” tax entity. Instead, the partners themselves are liable for the income tax on the partnership’s taxable income. Each partner individually takes into account his distributive share of each item of partnership income, gain, deduction, loss, and credit.
The concept of partnership taxation isn’t easy as it may seem. There are complex areas of the taxation processes that are best discussed and looked over by a professional. Working with a qualified accountant will help in maximizing all potential financial and tax benefits that a business partnership may offer.
The Pros and Cons of a Partnership
Having a business partner or partners can give great benefits to a business and its owners. But, like everything, it also comes with its disadvantages. Forming a partnership should be based on what is best for the company, not simply because there is more than one person involved in the business
Some advantages include; easier to raise money for capital, no double taxation because of the “pass-through” feature that comes with a partnership, and flexible allocation of income.
The cons that come with a partnership may include; unlimited liabilities, cost of expenses, and the assurance of the business continuity and life span are not guaranteed.
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