Business
Partnership
A business with more than one owner that files its own information return and passes profit through to the partners.
The partnership files Form 1065 and pays no income tax itself. Each partner gets a K-1 stating their share, and reports that share on their own return whether or not any cash was actually distributed.
A partner’s share is not always their ownership percentage. Guaranteed payments are paid for services regardless of profit and are treated differently again.
Whether a partner owes self-employment tax on their share depends on whether they materially participate. A passive partner generally does not; an active one generally does.
Related
Terms that come up beside this one
Schedule K-1
The statement a partnership or S-corporation issues to each owner reporting their share of its income, deductions and credits.
LLC
A legal structure that separates a business’s liabilities from its owners, formed with a state.
Material participation
Whether an owner is genuinely involved in running a business, which decides how their share is taxed.
Guaranteed payment
A payment a partnership makes to a partner for services or capital, regardless of whether it made a profit.