YOU may choose to run your business as a partnership. A Partnership is an association of two or more persons as co-owners who intend to carry on a business for profit. Each person must contribute money, property, labor, or skill. Mere co-ownership of property that is leased or rented is not a partnership. Spouses carrying on a business together and sharing profits are partners. The burden of filing partnership returns may be alleviated by having one spouse work for the entity. Here are benefits and drawbacks of using partnerships.
1. The partnership avoids double taxation as any net income is passed through to the partners.
2. Losses are also passed through to your personal income tax.
3. Such losses may be used to offset other forms of income in your personal income tax.
4. Partnerships are allowed to specially allocate income and expenses.
5. Partnerships are not subject to the accumulated earnings tax.
6. Partnerships are not subject to or personal holding company tax.
7. A special election allows a step-up in the basis of assets upon the death of a partner.
8. This special step-up is also available on the sale or exchange of partnership interest or in certain partnership distributions.
9. A partner’s basis includes the partner’s share of partnership debts.
10. It has a lower audit profile than sole proprietors.
1. General partners have unlimited liability.
2. Their situation is even worse than sole proprietors because they also have to worry about other partners’ liabilities that can affect business operations as well their own personal assets.
3. Partner fringe benefits are not excludable from their income. This includes 100% health insurance deductibility, meals and lodging, and group term insurance.
4. Partner earnings from a trade or business are subject to FICA even if earnings are not distributed.
5. Partnerships must use calendar years (December) in the absence of a business purpose to use a fiscal year end (January to December)
* * *
Victor Santos Sy graduated Cum Laude from UE with a BBA and from Indiana State University with an MBA. Vic worked with SyCip, Gorres, Velayo (SGV – Andersen Consulting) and Ernst & Young before establishing Sy Accountancy Corporation in Pasadena, California.
* * *
He has 50 years of experience in defending taxpayers audited by the IRS, FTB, EDD, BOE and other governmental agencies. He is publishing a book on his expertise – “HOW TO AVOID OR SURVIVE IRS AUDITS.” Our readers may inquire about the book or email tax questions at email@example.com.