Here is a quick overview of a Partnership Limited Liability Company (LLC):
Must have two or more owners
Protection of personal assets if business is sued
Separate tax return is filed for the partnership (form 1065)
Depending on your state, there can be high renewal fees or publication requirements.
Many states have a franchise or capital values tax on LLC’s
The LLC for a partnership is created the same way as an SMLLC – by registering with your state. It has all the same limited liability protection as the SMLLC, but it’s for two or more owners.
You would report your annual income and expenses on a Form 1065 partnership return, which is completely separate from your personal tax return. No tax is paid with the return; the income and expenses flow through to your personal tax return through a K-1 form, where it’s taxed.
To picture this, imagine your accountant has finished preparing the partnership return. No tax is due with the return because the partnership itself isn’t taxed. Your accountant gives you a paper called a K-1. On this form, it reports your individual share of the business’s income and expenses. When it’s time to complete your personal tax return, you or your accountant will enter the information from the K-1 form into the tax program. Now, when you look at the front page of your federal tax return, you’ll see your share of the income or loss generated by the partnership on line 17.
If you decide a partnership is the best option for your business, it’s a good idea to set up a partnership agreement to decide on ownership percentages and how much each of you will be paid when it’s time to distribute the income. You may even consider working with a lawyer to create the agreement so if any tricky situations come up, you have a rock solid agreement to reference.