General Partnership

Partnership is similar to a sole proprietorship by its structure but has more than 1 owner. There is no need to register with the state. However, a partnership agreement is required. An EIN number is required for a partnership. The name must either contain the last names of partners or the partnership should obtain a fictitious name from the county clerk. There is unlimited responsibility for the general partnership meaning, the collectors can go after the personal assets of the partners.

You do not have to register the partnership with the state, even though some states will give you that option. A partnership agreement must be signed between partners outlining how the partnership is managed and how the net income is distributed.

Taxation

While partnerships don't pay federal or state income tax or state franchise tax, an information 1065 return form is required by the IRS by March 15. The form consists of 3 parts: Profit and Loss and statement that shows the sales, expenses and net income of the partnership; Balance Sheet reflecting the assets, liabilities and equity of it and K-1 forms where the income is distributed among the partners. Unlike schedule c, 1065 is filed separately from the partners’ individual tax returns.

For example: Joe and Kelsi have a general partnership. In 2022 they had $200,000 in sales, $120,000 in expenses and $80,000 in net income. Kelsi owns 60% and Joe owns 40% of the partnership. 2 forms K-1 are issued showing $32,000 distributed to Joe and $48,000 to Kelsi. Joe and Kelsi later report this on their personal tax returns where the income will most likely be subject to personal income tax and self-employment tax.

There is no special procedure for the partners to pay themselves or to invest money in the business. Owners can make non tax deductible withdrawals and nontaxable deposits as long as they keep tab on partners distributions and contributions.