Summary: In this particular episode, you will learn About Partnerships Flow-Through Businesses Podcast transcript: Disclaimer: This information is for educational purposes only and not to be used as tax or legal advice. Tax law and accounting protocol are constantly changing. Topics Flow-through Entities and Corporate Double Taxation General Partnership Limited Partnership (LP) Limited Liability Company (LLC) Sole Member LLC (SMLLC) Flow-through Entities and Corporate Double Taxation Partnerships, limited partnerships (LPs), and limited liability companies (LLCs) are referred to as flow-through entities for tax purposes. LPs and LLCs generally fall under the same tax and accounting rules formally established for regular partnerships. Flow-through entities do not pay federal or state income tax and therefore “flow” income and loss activity to owners. Owners then report income and deductions on a tax return as an individual or other business entity. The owner of a partnership, limited partnership, or limited liability company can be an individual, another partnership structure, corporation, and certain trusts. Some entities, such as trusts, may be a hybrid between flowing out income to beneficiaries and paying tax at the trust level. In addition to tax at the individual partner level, partnership entities may also pay state and local fees. State and local fees for flow-through entities are generally small compared to tax at the individual level. Fees can create some double-taxation; however, double taxation generally refers to the dual taxation of corporate income and corporate dividends. Regular corporations are taxed on profits at the corporate level and are therefore not flow-through entities. Once a corporation has paid tax on profits, dividends may be paid to shareholders who are owners of the corporation. Dividends are considered income to shareholders and are taxable. Corporate profits are therefore subject to double taxation because there is tax at both the corporate and shareholder level. General Partnership The general partnership entity structure is comprised of two or more owners referred to as partners. Ownership of a partnership’s income, loss, and capital is represented as a percentage or units, which calculate to an ownership percentage. No stock is issued. A general partnership is not a separate entity from the owners. Partners are therefore personally liable for all business debts and lawsuits. If two or more individuals start operating as a business they will likely be considered a general partnership. The partnership establishes a business name by filing documents with the local government. Partners may choose to have a partnership agreement to govern operations of the business. As a flow-through entity, profit and loss for tax purposes are reported on the partner’s tax return, whether as an individual or business. Employees and partners receive compensation differently under the partnership structure. The entity may have employees who are paid wages. Partners generally distribute money to themselves based on profit or loss; however, may also be compensated using guaranteed payments. Guaranteed payments are similar to employee compensation, but without taxes being withheld. Typical general partnerships are small in nature and may be for: property ownership, consulting services, and two or more individuals operating informally. Advantages Partnerships can be setup informally without additional legal or state fees. The structure allows for multiple owners and outside investment. The ownership is very flexible and can divide profit, loss, and capital ownership percentages differently. There is no tax on the federal level, but a separate federal tax return is still required. Similar to draws in a sole proprietorship, partners generally take distributions to receive cash payments. Partners may also be compensated unevenly using guaranteed wages,
