Partnership with employees
A partnership is similar to a sole proprietorship except that two or more individuals own and or operate the business. The partners may, like the proprietor, simply begin operations with a verbal agreement, such as a husband and wife team. However, most partnerships create a legal partnership agreement spelling out the terms of ownership, outlining the duties of each partner, and outlining provisions for sale or transfer of ownership. Partnerships generally operate under a trade name, although the partners names may be used as the trade name, for example, Smith and Smith Accountants.
Partnerships must also comply with state and local laws for registering business activities. Partnership agreements may be filed with the state or locality for legal protection and identification. Additionally, a partnership will file for an Employer Identification Number (EIN) with the IRS to distinguish it from the individual partners. There are three types of partnerships that can be utilized, determined largely by the type and expected duration of business activities. A general partnership is one in which equal ownership, management, legal, and financial responsibilities are shared between the owners.
General partnerships are usually intended to be ongoing business operations. A limited partnership is when one or more owners have unequal ownership, management, legal, or financial responsibilities. Many limited partnerships have a managing partner who is solely responsible for day-to-day operations, and several limited partners who may only have a personal financial investment in the business. A limited partnership agreement may state that limited partners have limited legal liabilities as investors.
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Investors know the duration of their investment and have an expected date to receive the return on their investments. Partnerships must file IRS form 1065, which is a declaration of partnership income, but the business itself pays no taxes. Each partners’ share of income is then reported on Schedule E and transferred to their 1040 series as taxable income. Partners must also file Schedule SE for self employment taxes. They then pay taxes at the corresponding individual tax rates. Partnerships with employees are subject to the same withholding and social security matching requirements as sole proprietors with employees.