Question

Dave and Frank formed a general partnership to do lawn maintenance work. The partnership earned $60,000 during the first year. When taxes are due, _____________.

	a.	they should not file a return because they are paid in cash, so how will the government know their incomes?
	b.	the partnership pays tax, then Dave and Frank pay tax on their incomes (double taxation).
	c.	only the partnership pays taxes; Dave and Frank do not. This is a chief advantage of this kind of entity.
	d.	the partnership does not pay tax. Dave and Frank pay taxes on their personal incomes (single taxation).

Answer 1

The correct answer is: (d) the partnership does not pay tax. Dave and Frank pay taxes on their personal incomes (single taxation).

General partnership is a business partnership where all partners have responsibility for the business and unlimited liability for business debts. Each general partner is responsible for the business in some way. This means that each partner must contribute something to the partnership, such as funds, property, skills or labor. Each general partner shares the business profits, liabilities and losses.

The main advantage is that the partnership isn't separately taxed. The IRS doesn't treat the partnership as a separate tax entity. In this way, it's treated the same as a sole proprietorship rather than like a corporation. This means that the business profits aren't taxed. Instead, the profits flow through or pass through to the partners. The business profits become the partners' income. The partners then file their own tax returns and pay income tax on their individual income. The main disadvantage is that general partners have unlimited liability for partnership obligations.