Partnerships, filing March 17, enable two or more individuals or business entities to work together as a single business. Partnerships enable combinations of bright ideas, hard work and capital to make businesses as diverse as law, accounting, construction or retail ownership. LLCs protect personal assets as members file with tax strategy as proprietorships, partnerships or corporations. These businesses hedge both stock and employment markets with local time, talent and treasure generating wealth and independence.
Forming Partnerships and LLCs
Partnerships should establish written “Partnership agreements” but avoid formal filing. Multiple LLC Members devise “Operating Agreements” establishing rights, duties and profit-sharing methods before filing at the CA Secretary of State, which issues a SOS number and demands annual reporting and $800 annual fees for LLCs, limited partnerships or corporations. LLCs require fewer board meetings and less paperwork than corporations. LLCs can stress democratic member management where all are agents or delegate authority to member managers leading passive investors. Liability insurance is the best protection against lawsuits which “pierce veils,” but “LLC” lends prestige.
Like LLCs, partnerships need EINs for partnership tax returns: Federal Form 1065 and CA Form 565. General partners, one required, assume personal liabilities, but not limited partners. LLCs limit personal liability to every one of their “members,” but lenders often require personal guarantees for loans. General partners and active LLC members must pay self-employment taxes (6.2% OASDI and 1.45% Medicare). Except for S-Corps, the number and nationality of partners or members is unlimited. Brokerages exchange “Publicly Traded Partnership” shares to distribute exotic tax benefits like oil and gas depletion.
Tax Filing Single Member LLCs
Federally disregarded single member LLCs just enter data onto Schedule C, CA Form 568. Entrepreneurs offset declared revenues with “ordinary and necessary expenses” and avoid corporate double taxation and, with dividends rewarding investments, avoiding self-employment taxes with S-elections. Tracking mileage, counting inventory costs and recording home office expenses are most critical, but you may have insurance, contractors, advertising, travel or supplies. New businesses may immediately deduct up to $5,000 of startup expenses while amortizing the rest over 15 years. Reduce taxes with retirement or health insurance or with Trump’s higher depreciation and QBI deductions.
Partnership Tax Filing
Form 1065 and California Form 565 also ask pokey questions about LLC formation, business activity codes, ownership rights, etc. Do partnerships have related parties, deferred income, out of state interests, reportable tax transactions or IRS audits and are transactions between partners and the partnership reported? Make sure you file returns and properly dissolve unwanted LLCs or Limited Partnerships to stop outrageous payments and paperwork.
Partnership returns frequently require balance sheets that calculate total assets and liabilities, with accounting mounting if assets exceed $250,000. Partnerships issue forms K-1 (like trusts and S-Corps) to partners with declared SSNs that transfer varied income, deductions and credits per partner shares to individual Schedule E. Partners can also claim “Unreimbursed Partnership Expenses” like home offices or travel separately on Schedule E.
Schedule L seeks balance sheets for this year and the preceding year, which state cash, investments, depreciable assets like buildings or equipment, intangible assets like patents, and partner liabilities or capital accounts. Schedules M-1 and M-2 reconcile differences between tax and book accounting and track partners’ capital accounts for partnership share changes, which combine the partnership’s finances with the partners’ investments; seek specialized accounting help.
Partnership Pros and Cons
Partnerships or LLCs both let owners take off some of the time with others handling the business, perhaps pursuing multiple opportunities. Owners gain the experience, knowledge and reputation of others as they steady cash flow with better capital. But beware that partners’ life cycles change. All general partners are responsible for the mistakes or debts of any partner and profits are split regardless of who feels they contributed most. Partnerships are hard to sell and they dissolve with partner death or incapacity or need costly valuations and business wrangling. Internal friction destabilizes businesses when partners disagree about the future direction of businesses.
Hedge stock and employment markets with faith in your neighbors! Partnerships work well for people with trust, common interests and complementary skillsets. LLCs give liability protection to all members who choose tax entities for tax strategies.
Robert Arne, EA, CFP, MS, of Carpe Diem Financial Life Planning, is a Santa Cruz Mountain Certified Financial Planner who gives holistic financial advice as his client’s fee-only fiduciary. These articles are not personal financial, mortgage, tax or investment advice; consult appropriate professionals. Learn more at www.carpediem.financial.
