Partnership Taxation
Partnerships are pass-through businesses. Partnership income is taxed by "passing through" to the owners. Even though the partnership itself does not pay income taxes, partners pay tax on their "distributive share" of the business’s taxable income.
- Partners pay taxes on their allocated share of the profit, regardless of how much profit is actually paid out to them.
- Partnerships must file Form 1065 with the IRS and issue Schedule K-1 to partners.
- General partnerships pay self-employment taxes using Schedule SE, contributing to Social Security and Medicare.
Partnership Tax Advantages
A partnership itself does not pay income taxes, avoiding double taxation faced by C corporations. Partners have pass-through taxation, paying taxes on their share of profits at individual rates.
Partnership Tax Disadvantages
Partnerships have pass-through taxation where partners pay taxes on profits at individual rates. The main disadvantage is unlimited liability, as partners are responsible for debts and obligations. Partnerships can lead to conflicts over management or finances.
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