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Partnerships

A Partnership is the relationship existing between two or more persons who join together to carry on a trade or a business.  Each individual contributes money, property, labor or skill and expects to share in the profits and losses of the business.

General Partnerships

As a rule, General Partnerships (GP) in Virginia can be formed with no formalities, although it is highly advisable to have a written partnership agreement in place.  This agreement should spell out, in considerable detail, such matters as:

  • How much and what kind of property will each individual contribute to the partnership?
  • What value will be placed on the contributed property?
  • How will the profits and losses be divided among the partners?
  • How will the gain or loss be allocated for tax purposes or property contributed to the partnership by one or more of the partners, where such property has a tax basis significantly greater or less than its agreed value?
  • When and how will profits be withdrawn from the partnership?
  • How will certain partners be compensated for making capital available to the partnership?
  • How will changes in ownership and/or interests in the partnership be handled?
  • When and how will the partnership terminate its existence?
  • How will the assets and liabilities of the partnership be handled when the partnership is terminated?

A partnership does not pay any income tax at the partnership level.  Partnerships file Form 1065, U.S. Return of Partnership Income, to report income and expenses.  This is an information return.  The partnership passes the information to the individual partners on Schedule K-1, Partner’s Share of Income, Credits and Deductions.  Partnerships are often referred to as pass-through or flow-through entities for this reason.

Partners are not employees and so taxes are not withheld from any distributions.  Like sole proprietors, partners generally need to make quarterly estimated tax payments if the expect to make a profit.

Limited Partnerships

 

A Limited Partnership (LP), in which there is at least one general partner who is liable for partnership debts, and at least one limited partner, who is not liable for partnership debts, may also be formed under Virginia law.  Unlike a General Partnership, a Limited Partnership must always have a written partnership agreement and must file a “Certificate of Limited Partnership” with the State Corporation Commission.

Limited Partners are subject to self-employment tax only on guaranteed payments, such as professional fees for services rendered.

Limited Liability Partnerships

 

A Limited Liability Partnership (LLP) is a new form of partnership permitted in Virginia.  Like a Limited Liability Company, a Limited Liability Partnership provided limited liability for its owners while retaining the tax advantages of a partnership.  However, unlike a Limited Liability Company an LLP typically operates like a regular partnership and is not required to file Articles of Organization.  For more information about LLP registration and the financial responsibility and requirements, contact the State Corporation Commission or speak with your attorney.