How are partnerships taxed?

General and limited partnerships are taxed on income on a pass-through basis (ie, on the personal income taxes of each partner). The partnership as an entity is not subject to additional taxation. Partners are considered self-employed, and must pay a self-employment tax analogous to social security and Medicare taxes withholdings.

Limited liability companies (LLCs) may elect whether to file federal taxes as a corporation or on the individual returns of members.

Foreign partners, members and owners, or persons physically located outside the United States, are generally not exempt from state or federal taxes.

LLC members or corporate shareholders, if natural persons, may also be employed by their organisation. Such employment is taxed separately from income received by right of their status as an owner (eg, partner or member distribution). Income received for employment is subject to both federal and state income withholding.

Non-profit organisations are exempt from taxation only with respect to income directly related to their tax-exempt purpose.

Reporting and transparency requirements

To what extent must partnerships, LLPs and similar structures file accounts and other documents and information with a government agency?

Non-profit organisations must publicly file annual statements of income and expenses with the IRS to maintain tax-exempt status. These financials are subject to audit by the IRS, but need not be audited before submission.

For-profit organisations are not generally required to file financial information, with the exception of publicly traded C corporations. This information is typically considered a trade secret and in practice is shielded from public disclosure.

Ownership and membership

Can anyone be a partner, and, if not, who can and cannot? Can bodies corporate or other partnerships own a partnership?

Generally, unless specifically restricted by other statute or regulation, bodies corporate and other partnerships may be partners in partnerships, members in LLCs or shareholders in corporations.

Non-profit organisations do not have owners in the sense that no private individual or entity may benefit (ie, enjoy profits) from the operation of the organisation. Improperly conferring such private benefits upon the members of the non-profit organisation will result in loss of tax-exempt status and may result in civil and criminal liability.

Execution of documents

How do partnerships and LLPs execute documents? Must all partners sign? Can the partnership or LLP sign in its own name?

Execution of documents is determined by the internal organising documents or agreement of the organisation (ie, a partnership’s ‘partnership agreement’, LLC’s ‘operating agreement’, or corporation’s ‘by-laws’). Day-to-day decision-making is reserved to one or more general partners in a limited partnership, or to managers in a manager-managed LLC.

Per statute or agreement, certain decisions may require a vote of all partners, members or shareholders to effect - typically regarding major divestments, acquisitions or company dissolution.

Law stated date

Correct on:

Give the date on which the above information is correct.

22 July 2020.