If you own a business with one or more people, you might be operating as a partnership. Partnerships are business entities with multiple owners; they enjoy pass-through taxation, low start-up costs, and typically distribute legal, financial, and liability obligation equally among the partners.
For some business owners, partnerships offer great flexibility and limited red tape. However, applying for a tax ID, also called an Employer Identification Number or EIN, is one task that can’t be avoided. All partnerships must obtain a tax ID number, including all types of partnerships, which are outlined below.
There are three basic types of partnerships: general, limited, and joint ventures:
• General Partnerships
General partnerships divide the responsibilities and obligations of the business equally among all partners unless otherwise stated in a signed partnership contract or agreement.
• Limited Partnerships
Depending on the business, limited partnerships attract partners who might not want to share equally in the liability or management of the company, but still want to invest.
• Joint Ventures
Joint ventures are the same as general partnerships but with time limitations for a single project.
Depending on the company and your future business plans, these different types of partnerships may afford distinct advantages.
All partnerships must apply for a partnership tax ID, commonly called an EIN. Even though there may be multiple partners, only one EIN is needed for the partnership.
This unique, nine-digit number is furnished by the Internal Revenue Service (IRS), and is used by the business to file an annual information return with the IRS. This number also produces information needed by partners on a Schedule 1-K; each partner files his/her personal income tax return using the information provided on this form.
Without a partnership tax ID or EIN, you will not be able to provide or report important tax information.