SOAR TO SUCCESS / Core Business Strategies others. Both general and limited partnerships are treated as pass-through entities under federal tax law, but there are some minor differences in tax treatment between general and limited partners. For example, general partners must pay selfemployment tax on their net earnings from self-employment assigned to them from the partnership. Net earnings from self-employment include an individual’s share, distributedor not, of income or loss from any trade or business carried on by a partnership. Limited partners are subject to self-employment tax only on guaranteed payments, such as professional fees for services rendered. Partners are not employees of the partnership and do not pay any income tax at the partnership level. APartnership reports income and expenses from its operation and passes the information to the individual partners (hence the pass-through designation). Because taxes are not withheld from any distributions, partners generally need to make quarterly estimated tax payments if they expect tomake a profit. Partners must report their share of partnership income even if a distribution is not made. Each partner reports their share of the partnership’s net profit or loss on their personal tax return. Limited Liability Companies (LLC) A Limited Liability Company (LLC) is a business structure allowed by state statute. Each state is different, so it’s important to check the regulations in the state in which you plan to do business. Owners of an LLC are called members and may include individuals, corporations, other LLCs, and foreignentities.Most states alsopermit “single-member” LLCs with only one owner. Depending on elections made by the LLC and the number of members, the IRS treats an LLC as either a corporation, partnership, or as part of the LLC’s owner’s tax return. A domestic LLC with at least two members is classified as a partnership for federal income tax purposes unless it elects to be treated as a corporation. An LLC with only one member is treated as an entity disregarded as separate from its owner for income tax purposes (but as a separate entity for employment tax purposes and certain excise taxes) unless it elects to be treated as a corporation. Seek Professional Guidance One form of business entity is not necessarily better than any other and obtaining the advice of a tax professional is critical. If you need assistance figuring out which business entity is best for your business, don’t hesitate to call. Come back next month for my discussion of corporations.
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