Partnerships

Question: What is a partnership? What is a limited partnership, what is a general partnership? How is risk allocated in partnerships?

Answer: A partnership is an unincorporated organization of two or more members, that is involved in trade or business with the intent to make profits. A general partnership is composed of general partnerships, who are each personally liability for any liabilities arising from the course of activity.

A limited partnership is formed under the articles of state partnership law and consist of at least one general partner and one limited partner. The limited partners, according to law, have partnership risk limited to only their investment in the partnership. The general partner carries unlimited risk.

With partnerships, income flows through the 1065, (partnership tax form) to be taxed at the individual partners rate. It is referred to as a passthrough entity because the tax liability pass through the partnership, to each pro-rata partner's share. For instance, a general partnership has 2 partners. If each own 50%, and the partnership makes $100,000 for the year, $50,000 flows throught on a K-1 to be taxed on the partners 1040's.