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Tax Liability of Partners and Partnerships

One of the most practical benefits of forming a partnership, as opposed to a corporation, is the tax treatment of partnerships by the federal government in the Internal Revenue Code. Owners of a corporation, in effect, pay double taxes. The corporation it-self must pay taxes on business income. The money, which has already been taxed, is eventually distributed to pay salaries, dividends, and other forms of income to those involved in the corporation. These individuals must pay tax on the money received, even though the corporation was initially taxed. Partnerships, by comparison, are treated as so-called “passthrough” entities. The partnership itself does not pay taxes. The partnership’s income “passes through” the partnership and is distributed to the partners. When the partners pay taxes on their in-come, this money has not yet been taxed.

Inside Tax Liability of Partners and Partnerships