TO: Mandelkorn
FROM: Shuai Han, Tax consultant at Deloitte Tax LLP
DATE: 11/11/2014
SUBJECT: Selecting Partnership Formation
In our prior conversation, you raised an issue on selecting the best partnership formation in current situation. After extensive researches, I would like to use this opportunity to clarify the answer for you. I constructed the memo into introduction of partnership, different types of partnerships, advantages and disadvantages of different partnerships, federal case studies, and recommendation.
Introduction of Partnership:
According to Internal Revenue Code, a partnership is an association formed by two or more persons to carry on a trade or business, with each contributing money, property, labor, or skill, and with
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There are several types of partnerships, each designed for different situations. There are general partnership, limited partnership, limited liability partnership (LLP), and limited liability company (LLC).
Advantages and Disadvantages of Different Partnerships
General Partnership:
In a general partnership, the partners of the business share the profits and losses in accordance with their partnership agreement. In this particular entity formation, all partners are able to participate as managers of the company. Each managing partners have unlimited personal liability and full authority to conduct business on behalf of the general partnership. No formal paperwork needs to be filed in order to form a general partnership, and a partnership agreement is not required either; however, co-owners should clearly set out in advance each partner’s upfront and potential future contributions, level of involvement in the business and precisely what will happen in the event of a liquidation (2).
Advantages of general partnership:
• It does not pay tax on business entity level. Instead, each managing partners receive a schedule K-1 and reports his/her share of the business on personal tax return.
• Simple and inexpensive to operate
• No registration with States is required
• Partners are treated equally and have authority to conduct business on behalf on the entity
Disadvantages of general partnership:
• It is the most dangerous form to conduct
| A general partnership is comprised of a group of two or more individuals who enter into an agreement to start a business. The partners and the business are legally the same. The partners enter into an agreement called the articles of partnership and are typically equally active in the business and the business’s management, unless otherwise stated in the partnership agreement. All profits and losses are shared by the partners in a joint business venture.
"The association of two or more persons to carry on as co-owners of a business for profit forms a partnership,
When it comes to partnerships Alex, Bill, Carl, and Devon will have two options- a general partnership or a limited partnership. Partnerships are beginning to be a business form of the past. Once upon a time, partnerships were “the default form of business and provided the benefit of pass-through taxation, but lacked the important feature of limited liability” (Chrisman, 2010, p. 465). In a general partnership, each partner associated with the entity will be held liable for their own business decisions as well as
The essence of a partnership is that it is collaboration amongst equals, with the recognition that by working
Liability All liabilities are the responsibility of each partner. In the event of litigation, any creditors can go after the personal assets of each partner to recover any debt owed. But since liability is spread out between the owners, one may feel less risk is being taken. 2. Income Taxes General partnership may also benefit from pass-through taxation, meaning the partners are taxed like sole proprietors. Business income is reported on the personal tax filing while business losses can be deducted to reduce personal tax liability. The partnership itself is not subject to federal income tax. However the partnership needs to file an information return utilizing the IRS Form 1065. 3. Longevity or continuity of the organization Once the partnership agreement is fulfilled, the general partnership may dissolve. A buy/sell agreement may be included in the articles of the partnership to allow the
INCOME TAXES – This partnership is not subject to federal income tax. All earned and lost income from this business is taxable on the individual’s tax return.
General Partnership: Occurs when two or more individuals get together to operate a business with the intention of making profit. Each individual is a general partner of the business and all profits and losses are shared between the partners. General partnership agreements can be a written or verbal agreement.
Because there are no shareholders, the partners receive all the profits. This comes as a major advantage. Also an advantage, general partnerships have simplified taxes. This is the biggest disadvantage this type of business has. The business itself does not pay taxes. Any profits or losses recorded by the business are passed through each partner. Taxes are still filed, but taxes are not charged to the business. The partners must also file tax returns that show their individual shares of the company's profits and losses although partners are not treated as employees. Every business type has a legal liability. For general partnerships, this comes as a disadvantage. Since general partnerships are in part owned by
A group of owners may form a partnership. Some of the large CPA firms, doing over a billion dollars of business, were partnerships for many years. Recently these firms have become professional associations in order to limit the individual liability of the partners. However, being a partnership for tax purposes can have some real advantages, and many businesses continue to keep that form.
The general partnership is where all general partners manage the business and are personally liable for its debts.
LLC: LLC with at least two members is classified as a partnership for federal income tax purposes unless it files Form 8832 and affirmatively elects to be treated as a corporation. The limited liability company (LLC) offers an alternative to corporations and partnerships by combining the corporate advantage of limited liability protection with the partnership advantage of pass-through taxation.
A general partnership is defined as “a form of business organization that comes into existence when two or more persons carry on business together with a view to profit” (McInnes et al. 537). Additionally, a partnership involves every partner taking responsibility for losses. When deciding whether or not a partnership exists, there are many factors that a court would look at to determine if this definition applied to Marty and Sally. The criteria for a partnership involves:
A partnership is a business organization where the partners own the business together and are
There are two types of partnerships one of them being limited partnership. Limited partnership is a type of partnership in which at the minimum one of the owners of a business is a limited partner and at least one of the other partners has limited liability, that is, he/she is a limited partner. Unlike general partners who are involved in every aspect of the business from making day to day business decisions to being personally responsible for all the debts of the business, limited partners are just investors in the business venture and therefore have very little to no influence at all on the everyday operations of the business.
In addition on proprietorship, a partnership is more flexible type which is a business relationship between several individuals who are similar desires to obtain the profits from the partnership’s operation.