Understanding Partnership Taxation
A partnership is a pass-through entity, such as a Subchapter S Corporation. This business entity is between at least two individual partners, each of whom are required to pay any income tax on his or her personal tax return. This amount is based on the partnership share, which is determined by the original partnership agreement or partnership law.
Business Partner Types
Throughout the year, partners must pay both estimated income taxes and self-employment taxes. Partners also must pay taxes on their share of income, even if the partnership doesn’t distribute any. Your partnership may be classified under the following categories:
General Partnerships
Where two or more partners share in the profits and the debt equally, or in certain percentages that are commonly decided upon in the agreement document.
Limited Partnerships
Where there’s at least one general partner and at least one limited partner. A limited partner shares partially in the profits, and their losses are limited to the extent of their investment.
Limited Liability Partnerships (LLP)
This is much like a general partnership, but a partner doesn’t take personal liability for the negligence of another partner. An LLP is a common professional arrangement.
Limited Liability Limited Partnerships (LLLP)
This type of business arrangement may shield partners from certain liabilities or obligations.
Family Limited Partnerships (FLP)
These business arrangements may consist of general and limited partners alike, and are often used to transfer wealth through multiple familial generations.
C-Corporations
(Not a partnership structure but mentioned for context.)
Illinois Tax Law Guidelines
LLCs with two or more members are also taxed as partnerships unless they’ve elected to be taxed as S corporations. Your Houston partnership tax attorney can clear up much of the confusion regarding these matters.
Because it is easier to dissolve than most other business entities, partnerships are also often used as vehicles for investment. If you’re a skilled tradesperson or businessperson, you may also favor a professional limited liability partnership.
Chicago Partnership Tax Lawyer
The laws and regulations surrounding partnership tax law may seem simple at first, but there are more than enough loopholes and nuances to make consulting with a Houston partnership tax lawyer worth your while.
Frequently Asked Questions
What is a pass-through entity in the context of partnership taxation?
A pass-through entity is a business structure where the income is passed directly to the partners, who report and pay taxes on their personal tax returns, based on their share in the partnership.
Do partners pay taxes even if profits aren’t distributed?
Yes, partners must pay taxes on their share of the partnership’s income regardless of whether the profits are actually distributed.
What’s the difference between a general partnership and an LLP?
In a general partnership, all partners share liability, while in a Limited Liability Partnership (LLP), partners are protected from personal liability for another partner’s negligence.
How are LLCs treated for tax purposes in Illinois?
In Illinois, an LLC with two or more members is generally taxed as a partnership unless it has elected to be treated as an S corporation.
Why should someone consult a partnership tax lawyer?
Because partnership tax law includes complex classifications and nuances, a partnership tax lawyer can provide clarity and help avoid legal or tax complications.