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An unincorporated organization with two or more members is generally classified as a partnership for federal tax purposes if its members carry on a trade, business, financial operation, or venture and divide its profits.However, a joint undertaking merely to share expenses is not a partnership.A limited liability company (LLC) is an entity formed under state law by filing articles of organization as an LLC.Unlike a partnership, none of the members of an LLC are personally liable for its debts.These rules (a) allocate the partnership’s income, losses, deductions, and credit among the partners and (b) adjust basis to reflect each partner’s allocation of those items.

The rules you must use to determine whether an organization is classified as a partnership changed for organizations formed after 1996.

Unlike the rules that apply to C corporations, which tax income both at the entity and at the owner level, the partnership rules are designed to only tax income once, at the owner level.

A partnership’s income, losses, deductions, and credit are passed through to the partners for Federal tax purposes and taxed directly to them, regardless of when income is distributed.[1] Since the partners have already paid tax on the income when it is earned, a complex system of rules applies to prevent double taxation when the income is later distributed to the partners.

Partnerships allow multiple people to pool their assets together and conduct business.

When it comes time to part ways, the partnership distributes its assets back to the partners and dissolves.

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