A partnership is not treated as a separate tax-pay entity. Each partner is taxed on that partner’s allocable share of partnership tax items. Thus, there is only one level of tax on partnership income. Investors have a great deal more flexibility in the context of partnership with respect to allocations of tax items.
Limited Liability: In a general partnership, all partners are jointly and severally liable for the debt of the partnership. In a limited partnership, there must be at least one general partner who is personally liable for the obligations of the partnership. Limited partners are not personally liable for partnership debt as long as they do not participate in management of the partnership.
Tax Liability: Unlike a corporation, a partnership is not considered separate from its owners for tax purposes. Instead, it is what the IRS calls a “pass-through entity.” This means that business income passes through the business to the partners, who report their share of profits — or losses — on their individual income tax returns. Each partner must make quarterly estimated tax payments to the IRS. While a partnership itself doesn’t pay taxes, a partnership must file Form 1065, an informational return, with the IRS each year. This form sets out each partner’s share of the partnership’s profits (or losses), which the IRS reviews to make sure the partners are correctly reporting their income.