Common use of General Partnership Clause in Contracts

General Partnership. A partnership is a way of combining the re- sources, skills or talents of two or more people. It is a separate legal entity that must file its own tax return (Form 1065). However, net income (or loss) is allocated by classification to each partner (Form K-1) proportionate to the partnership agreement; and, income tax, self-employment tax and capital gains taxes are paid by the individual partners. Partners can then average their portion of farm income on their respective tax returns. No filings or public disclosure are necessary, but a written partnership agreement with buy and sell agree- ments, operating and management provisions, and liquidation agreements are strongly recommended. Partnerships have flexibility in allocating income between partners through the use of “guaranteed payments.” Guaranteed payments to specific partners are subtracted from net income before the percentage allocation has taken place. Farm income passing through the partnership to the partners’ individual tax returns is eligible for farm income averaging. Tax deferred retirement plans also are available to partners. Regardless of how many partners are in a partnership, only one Section 179 expense deduction (see above) is avail- able each year. The accounting requirements of partnerships can be considerable. Partners have their own tax equity in the partnership, called capital accounts. Contributions into and withdrawals out of the partnership, along with the earnings (losses), are netted against these capital accounts. Under ordinary business practices, accounting can be very simple; but partial or total distribution of a partnership interest can be complex, especially if withdrawals from the partnership have exceeded taxable income. In that case, the tax consequences may be severe. Partners are jointly and severally liable for the business actions of all other partners, which may actually increase the level of risk they are facing. Sources of capital available to the partnership will be contributions from partners and borrowings. Borrowings may be limited by the amount of col- lateral available to the lender, or by the personal guarantees of the partners.