LPs, LLPs, PCs...
The main tax advantage of each of the following types of business entities is that they are flow-through entities meaning that the tax effects of the business's profits and losses flow directly to the owners' tax returns. The business itself pays no income taxes. The owners receive their income in the form of distributions. Distributions can be in the form of phantom income (or loss), or actual cash and property.
A partnership is the relationship between two or more to own and operate a trade or business. Each party contributes money, property, labor or skill, and thereafter shares in the profits and losses of the business. By default this arrangement is a General Partnership (GP), which provides no corporate shield type of legal liability protections. Each partner is jointly and severally liable for damages.
A joint venture is usually considered a partnership for tax purposes. Accordingly, the Joint Venture would pay no tax on its income, but pass that income on to its participants
A Joint Venture (JV) can be described as a business undertaking by two or more who are engaged in a single defined project. The creation of a joint venture is a question of fact that will be determined by the circumstances. The necessary elements are: an express or implied agreement; a common purpose that the group intends to carry out; shared profits and losses; and each member’s equal voice in controlling the project.
Qualified Joint Venture
An unincorporated business jointly owned by a married couple is generally classified as a partnership for Federal tax purposes. For tax years beginning after December 31, 2006, the Small Business and Work Opportunity Tax Act of 2007 (Public Law 110-28) provides that a Qualified Joint Venture, whose only members are a married couple filing a joint return, can elect not to be treated as a partnership for Federal tax purposes.
Because a business jointly owned and operated by a married couple is generally treated as a partnership for Federal tax purposes, the spouses must comply with filing and record keeping requirements imposed on partnerships and their partners. Married co-owners failing to file properly as a partnership may have been reporting on a Schedule C in the name of one spouse, so that only one spouse received credit for social security and Medicare coverage purposes. The election permits certain married co-owners to avoid filing partnership returns, provided that each spouse separately reports a share of all of the businesses’ items of income, gain, loss, deduction, and credit. Under the election, both spouses will receive credit for social security and Medicare coverage purposes.
To provide legal liability protections, the owners may hold their ownership interests in the form of a Limited Partnership (LP). Despite its importance in assessing an individual’s tax liability, the determination of whether a person is a limited partnerfor federal income tax purposes is often uncertain. Under Sec. 1402, a limited partner is not subject to the Self-Employment Contributions Act (SECA) tax on the distributive share of income from trade or business activities of the partnership. In addition, the determination of whether income and loss is subject to the passive activity rules of Sec. 469 can hinge on whether the taxpayer is a limited partner.
The meaning of the term limited partner has evolved separately under each of these statutes. Today, however, there is some support for adopting a single meaning for the term for both Secs. 469 and 1402. In addition, beginning in tax year 2013, net income from an individual’s passive trade or business activities may be subject to an additional 3.8% Medicare contribution tax. As a result, the recently proposed regulations under Sec. 469 that provide for a new definition of limited partner have added significance.
Limited Liability Partnership
A Limited Liability Partnership (LLP) is a special type of partnership type made up of general partners only. Each general partner has limited legal liability. Each general partner has equal control.
A Professional Corporation (PC) is a type of business organization used by members of certain professions who seek the benefits and protections of a corporation (including S-Corporations) but who are not permitted to form a traditional corporation.