The Organizational Structure For Starting A Business

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A general partnership provides the simplest organizational structure for starting a business when two or more individuals decide to associate for the purpose of owning and operating a business. Like a sole proprietorship, a general partnership is not legally separate from its owners (partners). Consequently, partners are personally liable for the debts of the partnership. Unlimited personal liability represents one of the major disadvantages of organizing a business in the form of a general partnership.

Similar to what we learned about sole proprietorships, the personal affairs of the partners need not be separate from the business affairs of the partnership. For example, property used by the partnership can remain in the individual
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Like a sole proprietorship, a general partnership is the de facto legal entity when two or more people decide to start a business and take no other affirmative steps to establish an alternative entity. For example, an alternative legal entity could take the form of a limited partnership, a limited liability company, or a corporation. However, establishing these entities requires the owners to prepare and file relevant legal forms with state agencies.

Unlike a corporation, which the tax law recognizes as a separate taxable entity, a partnership is classified as a “pass-through” entity. As a pass-through entity, a partnership is a non-taxable entity, which means its profits and losses are reported on the partners’ individual tax returns (IRS Form 1040). Essentially, the taxable income of the partnership is treated as the income of the partners. While they do not pay taxes, partnerships are required to file a tax return, which is essentially an information return. A partnership tax return (IRS Form 706) discloses the income earned by the partnership and reports the various deductible expenses. However, the partnership tax return does not calculate a tax liability, as the tax liability is passed through to the partners and disclosed on an IRS tax form known as a “K-1.” The partners attached Form K-1 to their individual tax return and pay the relevant tax liability. The pass-through format avoids the potential for double taxation, as income is taxed only at
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