P is for Partnerships

Chris Wittich

P is for partnerships.  Partnerships are a very common tax structure, but to be taxed as a partnership the underlying business doesn’t necessarily need to be set up as a partnership.  Many new businesses these days are set up as Limited Liability Companies or LLCs.  The default setting for an LLC is to be taxed as a partnership, but they are flexible enough that if there is only one owner, it would be reported on the individual return as a Schedule C or Schedule E or Schedule F.  The LLC can also be converted into an S Corp tax structure, but let’s stick to partnerships for the moment.

A partnership passes through all of the income or loss to the individual shareholders in a way that is consistent with the partnership or LLC member agreement.  Partnerships are very flexible in that you could have different ways of allocating income or loss and they don’t need to be pro rata with the equity ownership.

The partnership might pass through all of the income, but that doesn’t necessarily mean there isn’t any tax to pay.  Many states calculate minimum fees for partnerships based on the activity in that state.  For multi-state partnerships or for partnerships that have out-of-state shareholders, there might be withholding or composite taxes due based on the income allocation of the partnership.  That might seem like tax for the partnership, but it’s more of a payment on behalf of the shareholders which is recorded as a distribution to that shareholder.

Generally, the income tax cash flow implications for the partnership come when the partnership makes a distribution to the shareholders so they have enough cash to pay their personal tax on the partnership income.


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