Partnerships

Internal Revenue Code Section 761(a) provides:
For purposes of this subtitle, the term “partnership” includes a syndicate, group, pool, joint venture or other unincorporated organization through or by means of which any business or financial operation or venture is carried on, and which isnot, within the meaning of this title…, a corporation or a trust or estate.

The definition of “partnership” for purposes of the Internal Revenue Code is fairly broad, but not overly useful, in helping to determine whether a certain business venture should be taxed as a partnership.

In contrast, the definition provided by the Revised Uniform Partnership Act (“RUPA”) is much more useful and concise (though not controlling): “Partnership” means an association of two or more persons to carry on as co-owners a business for profit.

Parsing this definition into its component pieces, we see that, at a minimum, a partnership requires: (1) two or more persons, (2) who jointly carry on a business, (3) as co-owners for profit. The first item to note is that a business or other operation conducted by a single person can never be a partnership: it is either not a separate entity under state law, or is a disregarded entity such as a single-member LLC, or is a corporation. (Note that for tax purposes, a “person” can be a corporation or a 32 partnership, as well as an individual.) Second, the partners must jointly “carry-on” the business. This implies that mere “co-ownership” of property does not, in and of itself, result in the formation of a partnership. And lastly, the partners must have a profit motive for entering into the partnership.

As a practical matter, the definition of partnership will only come into play when a question arises as to whether an informal relationship between two or more parties is labeled as a tenancy in common or some other form of co-ownership of property or loan arrangement or employment relationship, other than a partnership. If, under state law, the relationship qualifies as a partnership, then it will be treated as a general partnership. The assertion that a partnership exists will typically be made by either a third party seeking to hold all alleged partners liable for obligations of the alleged partnership or by one of the parties to the venture (e.g., an employee) seeking to claim a share of “partnership” profits.

The check-the-box regulations provide the formal mechanism through which unincorporated business entities may elect to be taxed as corporations, with the default rule being partnership treatment. So, for example, limited partnerships, limited liability partnerships, and limited liability companies are all taxed as partnerships unless they affirmatively elect to be taxed as corporations under the check-the-box regulations, on IRS Form 8832.

- Peter A. Dufour, JD, MBA & Constance Bingham CPA, MST
MacDonald Page & Co LLC