very simple partnership money questions

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  sagetrout subscriber Posts: 1

  January 2008

  I`ll assume there are some reasons why you`ve settled on forming a partnership vs. an LLC for your enterprise.   The decision about legal form of a business - sole proprietor, partnership, LLC, S-Corporation, or C-Corporation, is usually driven by a variety of legal and tax considerations.   While partnerships used to be very common they`ve been replaced for the most part by LLC`s because of the additional legal protections and tax advantages of an LLC. 
   
  If you`ve reviewed all this and settled on partnership as the most preferable form of business ownership, then here`s what you need to have.   First, you need to have a written partnership agreement.  It doesn`t need to be an overly complex document.  It should give the name and legal address of the partnership, name the partners, give the purpose of the partnership, and how profits will be divided. 
   
  What you are talking about is a general partnership.  That means that all partners are liable for the acts of the other partners.  It also means that you have no legal protection if the business is sued.  Your personal assets will be exposed to a lawsuit. 
   
  You`ll need to check with your bank to know about their requirements for opening an account but most likely they will want to see your written partnership agreement.   Your state will may require you to register the name of your partnership as a ficticious name - e.g. you call your business Smith and Company - depending on the nature of the business. 
   
  Your cash contributions to the partnership will be reported to the IRS on Form 1065.   The reason they need to be reported is because you will be subject to the "at risk" rules which limit the amount of deductions you can take if the business has losses.   You can`t deduct any more than the amount you have at risk and your capital contribution is part of that calculation. 
   
  Each partner can withdraw funds on their partnership account but this reduces the amount of capital they have "at risk".   Taxes are paid by the individual partner on their share of taxable net income of the business partnership, not the amount of money drawn from the bank account. 
   
  Getting access to the money on the partnership bank account isn`t a problem if you both are signers on the bank account.   Yes, you can put the money in your personal account. 
   
  I think your question may stem from a misunderstanding about the taxability of partnerships.  The partnership never pays income taxes.  It`s you - the individual partners - who pay the income tax.   The partnership is simply a conduit to collect revenues and pay expenses but the net results of that activity will wind up on your individual income tax return. 
   
  You may want to seek some guidance from a CPA or a tax professional before you embark on your enterprise.  In particular you want advice about the suitability of a partnership to your particular business.   This site has information about the different forms of business ownership and the relative advantages and disadvantages of each. 

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  glgcpa subscriber Posts: 0 Member

  January 2008

  
  My wife and I are planning to form a husband/wife partnership.  My questions are very simple: 1. If we put personal money (that we already paid income taxes on) into an account that is in the name of the partnership, how can we withdraw that money later?  Can we just transfer it back to our personal accounts?  Do we need to somehow report the personal contribution? 2. If the partnership earns money, we pay taxes on it, and the money stays in the partnership account, how do we get access to it?  Can we just transfer it back to our personal accounts? Thank you in advance for your help.
  
  According to a recent IRS ruling in a business where the sole owners are husband and wife you can elect to file as sole proprietors (2 Schedule Cs) as opposed to a more complex and expensive partnership return (Form 1065).
  Since you do not know how to report your initial contribution I will assume you have not spoken to an attorney regarding how to legally set up your business; thus you most likely do not have a formalized partnership plan.  Please be clear that just because you did this does not mean you do not have a partnership - it just means you haven`t spelled out how you intend to operate your business.  Also be aware that there are both state and Federal rules regarding business capitalization which may require you to put a minimum amount of cash into the business as "capital" or your "investment" in the business.  These rules are usually based on the state of business, the type of business and the form of business, among other things (such as liability and operational issues).
  If the money you put into the business bank account is recorded as "capital" or "investment", then when you withdraw it you will be withdrawing "capital" or "investment" and it would be recorded as return of capital and/or a gain/loss on investment.
  If the money you put into the business bank account is recorded as a business loan then the money you take out will be part interest and part principal loan repayment based on the terms of your loan agreement.  The interest would be recorded on your return as interest income and recorded on your business return(s) as interest expense.
  Neither partnerships nor sole proprietorships pay taxes on their own, but rather the results of the business operations flows through (or is directly reported in the case of a sole proprietorship) on your individual return.  If you wish to withdraw your respective share of the income, the withdraw would not have a tax effect.  If you`re a partnership the withdrawal would be a reduction in your partnership interest and if you`re a sole proprietorship it would be an "owner`s draw".
  As you can hopefully see, your questions are much more complex than you realized; thus, I recommend you have a consultation with an accountant to help you get properly set up.  At this time he or she can go over the specifics of how to properly and legally take money out of your business.
  Best wishes.

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