Basic Entities in the United States – Partnerships
Partnerships are similar to a sole proprietorship in that the individuals have personal liability. This means that each partner is liable for their own actions and the actions of the other partners. That is a big negative of the partnership versus a limited liability entity.
For tax purposes, partnerships are generally disregarded and the attributes of income and deductions are passed through to the individuals. That is why they are referred to as “pass-through” entities The partnership will file a federal partnership tax return as well state all partnership tax returns, but it usually does not have any taxable income at the partnership level. Rather, the taxable income is solely pass-through to the partners. Partnerships can also have some interesting tax issues. For example if people simply contribute cash to the partnership for their interest, it is easy. But if one person contributes cash and another person contributes assets, such as machinery and equipment or real estate, the basis of the asset in the partnership is dependent upon the basis in the individual member. This can present some interesting issues and differences between members and can result in different tax treatments for similar distributions.
Unfortunately, the personal liability of the individual partners for their own actions and the action of the other partners makes this undesirable for the operation of most businesses.In order to limit the liability of the owner of the business, it would be necessary to set up a limited liability entity. The two most popular entities in the United States are corporations and limited liability companies. Limited liability companies are a US creation and do not exist in most other countries. Corporations or other limited liability entities similar to that are available in many countries.