A partnership is the simplest entity available for more than two people to work together. The advantages of a partnership are;
- It is very flexible
- It is easy to make
- It is easy to dissolve
The partnership entity does not have to pay taxes, however it must file a tax return (Form 1065). The partners receive a From K1 that records their income, expenses and distributions. This information is then recorded on the individual tax return.
The disadvantage of a partnership is that each general partner is liable in total for any losses incurred by the partnership. The liability extends even beyond any assets invested in the partnership
One way to mitigate this is to have a limited partnership. In a limited partnership the “limited partners” liability does not extend beyond the investment that the partner has in the partnership. While this can be helpful, it is not a perfect solution.
Nowadays, most partnerships set themselves up as LLCs. An LLC is a Limited Liability Company and the partners (or “members”) are only liable to the extent of their investment in the partnership.
This setup is very common in real estate ventures where properties are maintained in individual LLCs to protect partners from potential losses.
A partnership can also be a foreign partnership formed in a country outside of the US, however not all foreign partnerships are considered as such.
Before setting up your business, it is vital that you consult with a competent CPA that can guide you through the process so that you maximize your protection and your tax savings.