“A partnership is not a legal contract between two equal individuals. It’s an emotional alliance between two people committed to each other’s success.” — Warren Buffet, investor and philanthropist
A partnership is not a taxpaying entity, but files an annual tax return, Form 1065, to report income, deductions, and other items. The same is true for a limited liability company (LLC) with two or more members; it also files a partnership return. Income, deductions, and other items pass through to partners and LLC members, who may be individuals, other partnerships, corporations, or other entities. Partners and LLC members report their allocable share of these items on their own tax returns. (Partnerships only become taxpayers if they’re audited under the centralized audit regime and adjustments are handled at the entity level.)
IRS Statistics
Recently released tax statistics show that the number of partnerships, including limited liability companies that file tax returns as partnerships, are doing just fine. These statistics are for 2021, the most recent year for statistics.
- There were 4,467,584 million partnerships (4.4% more than in 2020), representing more than 30.6 million partners (21% more than in 2020). Partnerships with only 2 partners made up 57.6% of all partnerships, while those with 100 or more partners accounted for 0.4% of all partnerships (but 37.6% of all partners).
- Partnerships passed through nearly $3.9 billion in total income, which is a 98.3% increase over 2020. They allocated over $3.8 trillion to their partners in 2021.
- Limited liability companies (LLCs) in the U.S. accounted for the majority (71.7%) of all partnership returns for 2021. This is the 20th consecutive year that LLCs dominated the number of partnership returns filed. LLCs were responsible for 25.5% of overall profits for partnerships, an increase of 23.1% over 2019.
- Limited partnerships represented only 9.9% of all partnerships in 2021. Nonetheless, they reported 28% of the profits and had the largest share of partners (34.9%).
- Total receipts (revenue) for filers in 2021 increased by 14.7% from the previous year to $9.3 trillion.
- Total assets for 2021 increased 17.7% between 2020 and 2021, from $43.2 trillion to $50.8 trillion.
- More than 95% of all partnership returns were filed electronically in 2021. This should soon approach 100% as all businesses filing at least 10 returns for 2023 (e.g., tax return, W-2s, 1099s, etc.) must so do electronically starting in 2024.
Which industries dominated? The finance and insurance sector accounted for more than half of all partnerships for both 2021 (49.6%) and 2020 (50.1%), and it made up almost a third of all partners for 2021 (32.3%) and 2020 (33.2%). While partnerships in this sector accounted for just over half of all partnerships, they reported less than a fourth (19.9%) of total assets, only 9.8% of total receipts, and just 14.5% percent of total net income (loss) for 2021.
Real estate and rental and leasing sectors, which had declined in 2020, increased revenues in 2021 to $1.2 trillion (from $822.6 billion in 2020).
Why do these statistics matter?
Even though C corporations are taxed at the highly favorable flat tax rate of 21%, many businesses continue to operate as pass-through entities, including partnerships and LLCs. There does not seem to be any shift away from this status, but going forward, you never know.
Final thought
It’s great to see the growth of partnerships, so I hate to end on a sour note. But large partnerships should be prepared for an increased audit rate. In recent years, the audit rate has been very minimal. But that could change, especially for large partnerships, given 2 factors:
- More IRS agents hired to perform audits
- Announced audits of large partnerships (on average those with a more than $10 billion in assets)
Will this impact the audit rate for smaller partnerships? Will any changes to audit rates for partnerships impact entity choice? Not likely, but we’ll have to see.
To read more about IRS statistics on entities, see these earlier blog posts.
