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Partnerships and LLCs

Partnerships and LLCs from a Tax Perspective

Partnerships and LLCsA partnership is not a taxpaying entity (unless there is an adjustment from an audit under the Bipartisan Budget Act audit rules), but it files an annual tax return, Form 1065, to report income, deductions, and other items. These items pass through to partners, who may be individuals, other partnerships, corporations, or other entities. Partners report their allocable share of these items on their own tax returns.

Recently released tax statistics show that the number of partnerships (including limited liability companies that file tax returns as partnerships) is on the rise. For 2015 (the most recent year for statistics), there were 3.75 million partnerships (2.9% more than in 2014), representing more than 27.2 million partners (down from 27.7 million partners the year before, which is the first decline since 2003).

Here is some other interesting tax-related information about these filers:

  • Limited liability companies (LLCs) accounted for the majority (67.7%) of all partnership returns. This is the 14th consecutive year that LLCs dominated the number of partnership returns filed. The number of LLC members increased by 5.9% (10.8 million members, compared with 10.2 million the previous year).
  • Limited partnerships represented only 11% of all partnerships. Nonetheless, they reported the most profits (31.2% of all returns) and the largest share of partners (44.1%).
  • Total receipts (revenue) for filers were down by 4.4%, but total assets increased by 4.4%.
  • Partnerships allocated more than $1.6 trillion to their partners.

Which industries increased the most?

The greatest increase in the number of partnerships was in information (36.5%) and manufacturing (32.8%). Those in construction increased by a healthy 14.3%; partnerships in the sector of professional, scientific, and technical services grew by 13%.

Which industries did the best?

While partnerships in the real estate and rental and leasing sector had the most number of partnerships and partners (nearly half of all partnerships and partner), those in the finance and insurance sector dominated in terms of assets, receipts and net income. The industry with the greatest increase in net income was transportation and warehousing, followed by accommodation and food services, and education and other services. Except for utilities, all of the other 19 industry sectors reported an increase in their assets in 2015.

Why do these statistics matter?

It’s difficult to say what impact taxes have on the choice of entity for business owners. With the dramatic cut in the tax rate for C corporations by the Tax Cuts and Jobs Act, there is considerable talk about this topic. We may see some migration from partnerships to these corporations. Many tax professionals are discussing this matter right now; most are advising that partnerships wait to see IRS guidance on the 20% qualified business deduction for partners and LLC members before taking action. Who knows? Future statistics will likely help to settle the question of the impact of taxes on entity selection.