The generally favorable federal income tax rules for partnerships are a common reason for choosing to operate as a partnership with multiple partners instead of as a corporation with multiple shareholders.  These are the most important partnership tax benefit rules:

  • You get pass-through taxation.
  • You can deduct partnership losses (within limits).
  • You may be eligible for the Section 199A tax deduction.
  • You get basis from partnership debts.
  • You get basis step-up for purchased interests.
  • You can make tax-free asset transfers with the partnership.
  • You can make special tax allocations.

Partnership taxation is not all great.  There are a few complications to understand.

  • Exposure to self-employment tax
  • Complicated Section 704(c) tax allocation rules
  • Tricky disguised sale rules
  • Unfavorable fringe benefit tax rules

You also must consider the following disadvantages for limited partners:

  • Limited partners usually get no basis from partnership liabilities.
  • Limited partners can lose their liability protection.
  • You need a general partner.

No type of entity (including a limited partnership in which you are a limited partner) will protect your personal assets from exposure to liabilities related to your own professional malpractice or your own tortious acts.

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