Ever thought of running your own business, but don’t want to be the sole owner or go through the red tape in forming a corporation or LLC? Consider starting a partnership! Partnerships are a common form of business organization due to the ease in starting them up and maintaining them. Their simplicity appeals to small businesses especially. Unlike corporations that are taxed twice (the corporation itself, and its shareholders), partnership taxes “pass through” the partnership entity and are shared by the partners.
Who can form a partnership?
Individuals who join a partnership become partners who proportionally share in the profits and losses the partnership will experience. Usually, a formal Partnership Agreement document is established to spell out any specific arrangements, be it written or oral. Certain kinds of organizations (formed after 1996) are NOT allowed to become partnerships. For example:
- Insurance Companies
- Joint-Stock Companies
- Real Estate Trusts
- Tax-exempt entities
- Certain banks
- Organizations wholly owned by state, local or foreign governments
- Organizations specifically required to be taxed as a corporation
A partner’s “basis” in a partnership can be determined by how much capital a partner contributes, be it through cash or assets like a car or an office space.
Ending a partnership
Partnerships cease to exist when one of these two events occur:
- The organization discontinues all operations and partners no longer carry out any business.
- When 50% or more of a partnership’s total interest is sold or exchanged within a 12 month period. This includes any sales or transfers between partners, and even the death of a partner.
For example, Jon, Mark, Dan, and Dave are members of the “TruFriends” partnership and have a basis of 20%, 20%, 25%, and 35% respectively. Jon and Dave decide to sell off their shares in the partnership to 4 different investors, but this totals 55% of “TruFriends” being sold within a year. Therefore “TruFriends” as a partnership ceases to exist and a new partnership will need to be established with the remaining and new partners.
Interested in learning more about partnerships? Follow our social media for future partnership articles. Or if you may happen to have a pressing tax or accounting question, contact us at MiklosCPA. We are a California accounting firm that helps small to medium businesses with their accounting and tax needs.