A partnership involves two or more persons carrying on a business for profit. The business is not a separately taxed entity, but rather, a conduit where the profit or losses of the partnership flow through to the partners. There are two basic types of partnerships (e.g., general partnership and limited partnership).
A general partnership involves two or more persons who agree to create a business and share the profits and losses. All of the partners share equal rights and responsibilities in managing the business. In addition, each general partner assumes full personal liability for the debts and obligations of the partnership.
A limited partnership involves two or more persons who agree to create a business and share the profits and losses. A limited partnership has at least one general partner and at least one limited partner. The general partner is responsible for managing the business affairs, while the limited partner typically provides only capital to the partnership. Similar to the general partnership, each general partner assumes full personal liability for the debts and obligations of the partnership. The limited partner’s liability is limited to their investment in the business.
In order to form in California, a limited partnership must first file a certificate of limited partnership with the California Secretary of State. A limited partnership formed in another state must register with the California Secretary of State prior to conducting business in the state.
- A partnership is a flexible form of business and relatively easy to set up.
- The partners will decide the structure of the organization and the distribution of profits and losses. A formal, written partnership agreement is advisable.
- A separate bank account should be established to run the operations.
- A partnership allows more than one owner, unlike a sole proprietorship.
- The cost to form a partnership is generally less expensive than forming a corporation.
- The partnership does not pay income tax. However, a limited partnership must pay an annual tax of $800. The items of income, deductions, and credits "flow down" from the partnership to the individual partners through the California Schedule K-1, Partner’s Share of Income, Deductions, Credits, etc. Each partner is responsible for paying taxes on their distributive share.
- In a general partnership, each partner is personally liable for all business debts and lawsuits.
- A partnership exists as long as the partners agree it will and as long as there are at least two partners, one of whom is a general partner.
- Every partnership that engages in a trade or business in California or earns income from California sources must file a California Form 565, Partnership Return of Income. Every limited partnership that is registered with the California Secretary of State must file Form 565, even if it has no income from California sources.
- The partnership provides each partner with a Schedule K-1 that states the partner’s distributive share of the partnership's items of income, deductions, and credits.
- The return due date is the 15th day of the 4th month after the close of the taxable year.
- A limited partnership must pay an annual tax of $800.
The partnership has no estimated tax requirements. However, partners may have to make estimated tax payments for their own reporting purposes.
The partnership may be required to withhold taxes if the partnership distributes California source taxable income to a nonresident partner. For more information about partnership withholding, see FTB 1017, Resident and Nonresident Withholding Guidelines.