Formation of partnerships should be considered only after respective partners have a full understanding of the potential tax implications.
All income or losses flows through from the U.S. partnership tax return form 1065, to each partner’s respective individual form 1040 return. Basis issues must be adhered to, meaning the amounts loaned to/invested in the partnership must be used to determine profit and loss sharing splits to the partners. This can have a dramatic impact on a taxpayer if he is in a high tax bracket, for example, and assuming he is a 50% partner (and therefore has loaned to/invested in the partnership), would need to report half of the partnership’s income on his form 1040.
In virtually all cases, an LLP (limited liability partnership) is more advantageous than that of a GP (general partnership) In the LLP, the liability is limited for limited partners within the entity and only the general partner is exposed to liability. While the GP exposes all partners to general liability). These are legal issues, and, of course, a qualified business attorney should be consulted before setting these agreements up.
These rules are complex, and like LLCs should be discussed with me before a decision on entity selection is made.