Taxes on General Partnership for Profits

A general partnership is the easiest form of legal business structure to create and
maintain. The essential requirement is the agreement among the partners to operate a
for-profit business. Like other legal business structures, specific tax laws apply to
reporting the general partnerships profits and losses and, if necessary, payment of taxes
on the profits. Although a general partnership is not required to pay income taxes on its
profits, the individual partners are required to pay tax on their share of the partnership
profits.

General Partnership Basics

To create a general partnership, a minimum of two people must agree to share ownership
of a business in which each of the partners is responsible for the management of the
business and equally assume the profits and losses of the business. Although a written
agreement is advisable, it is not necessary to create a general partnership and there is
typically no state-filing requirement either. All general partnerships, however, are
required to obtain an Employer Identification Number from the Internal Revenue Service.

Partnership Information Return

General partnerships do not pay income taxes. The profits and losses of the partnership's
business are passed through to the partners on an equal basis, regardless of the differing
contributions in time and effort among the partners. A general partnership, however, is
required to file an informational return -- Form 1065 -- with the IRS every year it is in
business. To be accepted by the IRS, Form 1065 must be signed by at least one of the
general partners. Along with Form 1065, the general partnership must also prepare forms
called Schedules K and K-1. The information on Schedule K summarizes the partners
entire share of profits or losses in the business. Schedule K-1 shows each partner's
separate share, and a copy of this schedule must be provided to each partner.

Individual Partner Returns

Like all individuals earning income, the partners are required to file Form 1040 with the
IRS. Because the partner's income is derived from the operation of the general
partnership, Schedule E must accompany the partner's Form 1040. The information
provided to the partner on the Schedule K-1 prepared by the general partnership is used
to complete Schedule E. The partner keeps the Schedule K-1 for his own records and does
not file it with the IRS.

Estimated Taxes
Throughout the year, each partner typically receives a periodic draw or payment from
the general partnership income. Because this payment is not subject to withholding tax
like an employee's wages, each partner is also required to pay estimated taxes using
Form 1040-ES. The form must be filed on a quarterly basis starting April 15 and include
the required payment as determined using the instructions that accompany the form.