Partnership

A partnership is an entity owned by two or more people as a trade or business. Each partner contributes money, property, labor and/or skill and shares in the profits and losses of the business. Partnerships are extremely flexible. The terms of the partnership, including each partner’s allocation of income and losses, are set forth in the partnership agreement.



A partnership does not pay tax at the partnership level but instead passes the income, deductions, gains, losses, etc. from its operations through to its partners. Each partner reports their share of the partnership's income or loss on their personal tax return. Partners are not employees and do not receive a W-2 from the partnership.



Types of Business Partnerships
A partner can be either a general partner or a limited partner. General partners are involved in the day-to-day operations of the business. They pay both income tax and self-employment tax based on their percentage of income from the partnership. They may also be personally liable for the debt of the partnership and their other partners. Each partnership business must have at least one general partner.



Limited partners are investors in the partnership. They do not pay self-employment tax, but they are subject to income tax on the net profit of the business. Limited partners typically are not liable for business debts.



Partnership agreements may include guaranteed payments to certain partners based on services provided or capital invested. Partners who receive guaranteed payments are subject to self-employment tax, even for limited partners.