Michael Fitzsimmons CPA

San Diego, CA

(619) 757-1500     info@fitz-cpa.com


The two main types of partnerships are the General Partnership (G.P.) and the Limited Partnership (L.P.). Specialized partnerships, such as Limited Liability Partnerships (L.L.P.) and Series Limited Partnerships are uncommon and only used in special circumstances.

In addition to income tax, partners owe Self-Employment tax on most partnership income. However, income allocated to limited partners generally is not subject to self-employment tax. A powerful aspect of a partnership is the ability to specially allocate items of taxable income, deductions, and tax credits among the owners (partners). Except under certain unusual circumstances, partnerships are required to file federal and state income tax returns annually.

General Partnership

A general partnership is the oldest form of multiple-owner business. Liability for actions of the business and other partners is a significant concern.

Although a general partnership is not a distinct entity under the law, it is treated as a separate entity for tax purposes. However, even as a separate entity under tax law, the partnership itself owes no income tax. It functions to divide or allocate items of taxable income, deductions, and tax credits among the owners (partners).

A general partnership typically does not need to be established or registered with state business regulators. In California, a general partnership does not pay the $800 annual minimum tax for which most business entities are liable.

Limited Partnership

A limited partnership combines the tax benefits of a partnership with the liability protection of a corporation, and is often used where some owners are simply investors. The general partner acts as business manager and remains fully liable for the debts of the business. Limited partners can lose what they invested but are not otherwise liable. Often a corporation is used to serve as general partner to enhance liability protection.

A limited partnership must be established as a separate legal entity under state law. Multistate businesses should consider formation in a low-tax, business-friendly state such as Delaware instead of California.

Business Tax Strategies

Please refer to these pages for more tax savings ideas:

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