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As discussed below, the term "partnership" includes a syndicate, group, pool, joint venture, or other unincorporated organization which is organized for the purpose of conducting any business, financial operation, or venture. Not included in the definition of a partnership is any corporation, trust, estate, or other organization specifically excluded by income tax regulations promulgated by the IRS under authority delegated by Congress [I.R.C., §§761(a), 7701(a)(2)], HOWEVER, a Limited Liability Company is an ideal creature to form for tax purposes because it allows the entity to be treated as a partnership for tax purposes, but offers the liability protections for state law purposes (that a partnership does not). Another words, your personal assets are exposed in the context of a partnership, but an LLC shields your personal assets from creditors subject to certain exceptions. LLC Formation Forming an LLC is relatively easy, and entails the followings steps (however proceeding without the advice of counsel is not recommended). The formation of an LLC typically entails the following and can be a simple process:
Partnership Tax Summary Whether or not an organization is treated as a partnership under applicable state laws is not determinative of its status for federal income tax purposes [Reg. §301.7701-1(c)]. It may not always be a simple matter to determine whether a partnership exists for federal income tax purposes [Reg. §1.76-1]. For example, if a sole proprietor takes in either an employee or a third party-investor who will share in the profits and losses of the business, a partnership will be considered to exist for federal income tax purposes, regardless of whether a formal agreement exists. A joint undertaking solely for the purpose of sharing expenses does not, of itself, create a partnership. Mere co-ownership of property which is maintained, kept in repair, and rented or leased does not constitute a partnership. For example, if an individual owner or tenants in common of farm property lease the property for cash or a share of the crops, a partnership is not necessarily created. Tenants in common, however, may be partners if they actively carry on a trade, business, financial operation, or joint venture, and divide the profits. Consequently, a partnership exists if co-owners of an apartment building lease space and in addition provide services to the occupants either directly or through an agent. The IRS has published a statement of its position with respect to certain arrangements which will be considered to form the basis of a partnership agreement for federal income tax purposes under the following facts. A group consisting of a bank and an insurance company joined together to construct and operate an office building. A written partnership agreement set forth provisions for cash contributions and for the allocation of profits and losses and provided for resulting increases and decreases in a partner`s interest. A subsidiary of one of the partners functioned as the managing partner and an affiliate served as the managing agent for the property. The IRS concluded that under all the circumstances the parties maintained the intent to do business jointly as partners and that the necessary characteristics of a partnership were present: joint contributions to capital, joint sharing of profits and losses, and joint control [G.C.M. 38-38856, 2-16-82]. It is possible that a business arrangement will create a partnership for tax purposes even though the participants in the transaction do not use the term "partnership." The Internal Revenue Code definition of a partnership is sufficiently broad to encompass most unincorporated business arrangements involving two or more investors where the IRS deems the substance (rather than the form) of the business arrangement to constitute a partnership. A helpful general definition is found in the Uniform Partnership Act adopted by most states: "[A] partnership is an association of two or more persons to carry on as co-owners a business for profit." The significant term is "co-owner" since only a co-owner of the business will be considered to be a partner where the parties have the intent to divide the profits and losses of the business. Central to the planning herein is the tax consequences associated therewith. A Limited Liability Company can also be taxed as a partnership and to that end, one should check the box to reflect as such.
Class Handouts |
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