Business Formation

Just as in a sole proprietorship, partners are still responsible for unlimited liability, both personal and business. Therefore, everything you own is at risk. Also, you cannot make certain important business decisions without the agreement of the partner. A general partnership offers few tax benefits to business owners.

An individual's share of partnership losses (reportable to a partner on a schedule K-1) may not exceed the adjusted basis of the partnership interest. The basis is generally the original capital paid, plus accumulated taxed earnings that have not been withdrawn, less withdrawals.
Partners are subject to the at-risk loss limitation and the passive activity loss limitation rules.
The at-risk limit affects the amount of the loss to the portion that that partner is personally liable for. Generally a passive loss is limited to either passive income or up tp $25,000 if there is active participation in a rental real estate activity.
There is no easy way to explain these rules. Please contact a local CPA to determine the deductibility of the loss reported on Schedule K-1. This area of the tax code is quite complex and confusing to many.

You may be treated as actively participating if for example you participate in making management decisions or arrange for others to provide services. Examples of management decisions are, approving new tenants, deciding on rental terms, approving capital or repair expenditures and other similar decisions.

Generally not. Interest income is defined as portfolio income, not passive income. Portfolio income includes interest, dividends, and gains on the sale of investment property. Passive K-1 losses can only be used to offset other passive income, except when the $25,000 special loss allowance for persons with active participation in rental real estate entities can be utilized.

No. The K-1 disallowed losses due to the At Risk limitation rules are not lost and can be carried over and may be deductible in future years. The term "At risk" means the exposure to the danger of economic loss. A person can claim a tax deduction in a limited partnership up to the amount he or she is at risk if the taxpayer can show it is at risk of never realizing a profit and of losing its initial investment

A single member LLC files as a disregarded entity on a Schedule C. It does not file as a Form 1065 Partnership tax return.

No. There are no citizen requirements for LLC's, Limited partnerships, Sole Proprietorships or S Corporations. There are citizen requirements for S Corporations.

Yes. LLC's have similar liability limits as do C or S Corporations. Sole Proprietorships and Limited Partnerships are personally liable for business liabilities.

Yes, An LLC and a C Corporation may be owned by another business instead of individuals. S Corporations, Limited parnerships and Sole Proprietorships cannot be owned by other businesses.