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Withholding on foreign partner or firm. If a

See How To Get Tax Help near the end of

purposes as either a partnership, a corporation,

partnership acquires a U.S. real property inter-

this publication for information about getting

or an entity disregarded as an entity separate

est from a foreign person or firm, the partnership

publications and forms.

from its owner by applying the rules in regula-

may have to withhold tax on the amount it pays

tions section 301.7701-3. See Form 8832 and

for the property (including cash, the fair market

section 301.7701-3 of the regulations for more

value of other property, and any assumed liabil-

details.

Forming a Partnership

ity). If a partnership has income effectively con-

A domestic LLC with at least two mem-

nected with a trade or business in the United

bers that does not file Form 8832 is

TIP

States, it must withhold on the income allocable

The following sections contain general informa-

classified as a partnership for federal

to its foreign partners. A partnership may have to

tion about partnerships.

income tax purposes.

withhold tax on a foreign partner’s distributive

share of fixed or determinable income not effec-

Organizations Classified as

Organizations formed before 1997. An or-

tively connected with a U.S. trade or business. A

Partnerships

ganization formed before 1997 and classified as

partnership that fails to withhold may be held

a partnership under the old rules will generally

liable for the tax, applicable penalties, and inter-

An unincorporated organization with two or

est.

continue to be classified as a partnership as long

more members is generally classified as a part-

as the organization has at least two members

For more information, see Publication 515,

nership for federal tax purposes if its members

and does not elect to be classified as a corpora-

Withholding of Tax on Nonresident Aliens and

carry on a trade, business, financial operation,

tion by filing Form 8832.

Foreign Entities.

or venture and divide its profits. However, a joint

Community property. A husband and wife

undertaking merely to share expenses is not a

Comments and suggestions. We welcome

who own a qualified entity (defined later) can

partnership. For example, co-ownership of prop-

your comments about this publication and your

choose to classify the entity as a partnership for

erty maintained and rented or leased is not a

suggestions for future editions.

federal tax purposes by filing the appropriate

partnership unless the co-owners provide serv-

You can write to us at the following address:

partnership tax returns. They can choose to

ices to the tenants.

classify the entity as a sole proprietorship by

Internal Revenue Service

The rules you must use to determine

filing a Schedule C (Form 1040) listing one

Business Forms and Publications Branch

whether an organization is classified as a part-

spouse as the sole proprietor. A change in re-

SE:W:CAR:MP:T:B

nership changed for organizations formed after

porting position will be treated for federal tax

1111 Constitution Ave. NW, IR-6526

1996.

purposes as a conversion of the entity.

Washington, DC 20224

Organizations formed after 1996. An organi-

A qualified entity is a business entity that

zation formed after 1996 is classified as a part-

meets all the following requirements.

We respond to many letters by telephone.

nership for federal tax purposes if it has two or

•

Therefore, it would be helpful if you would in-

The business entity is wholly owned by a

more members and it is none of the following.

clude your daytime phone number, including the

husband and wife as community property

•

An organization formed under a federal or

area code, in your correspondence.

under the laws of a state, a foreign coun-

state law that refers to it as incorporated

try, or a possession of the United States.

You can email us at *taxforms@irs.gov. (The

or as a corporation, body corporate, or

asterisk must be included in the address.)

•

No person other than one or both spouses

body politic.

Please put “Publications Comment” on the sub-

would be considered an owner for federal

ject line. You can also send us comments from

•

An organization formed under a state law

tax purposes.

, select “Comment on

that refers to it as a joint-stock company or

•

Tax Forms and Publications” under “Information

The business entity is not treated as a

joint-stock association.

About.” Although we cannot respond individually

corporation.

•

An insurance company.

to each comment received, we do appreciate

your feedback and will consider your comments

For more information about community prop-

•

Certain banks.

as we revise our tax products.

erty, see Publication 555, Community Property.

•

An organization wholly owned by a state

Publication 555 discusses the community prop-

Tax questions. If you have a tax question,

or local government.

erty laws of Arizona, California, Idaho, Louisi-

visit IRS.gov or call 1-800-829-4933. We cannot

•

ana, Nevada, New Mexico, Texas, Washington,

An organization specifically required to be

answer tax questions at either of the addresses

and Wisconsin.

taxed as a corporation by the Internal Rev-

listed above.

enue Code (for example, certain publicly

Family Partnership

Ordering forms and publications.

Visit

traded partnerships).

to download forms and

•

Certain foreign organizations identified in

publications, call 1-800-829-3676, or write to

Members of a family can be partners. However,

section 301.7701-2(b)(8) of the regula-

one of the addresses shown under How To Get

family members (or any other person) will be

tions.

Tax Help in the back of this publication.

recognized as partners only if one of the follow-

•

ing requirements is met.

A tax-exempt organization.

Useful Items

•

If capital is a material income-producing

A real estate investment trust.

You may want to see:

factor, they acquired their capital interest

•

An organization classified as a trust under

in a bona fide transaction (even if by gift or

Publication

section 301.7701-4 of the regulations or

purchase from another family member),

otherwise subject to special treatment

actually own the partnership interest, and

334

Tax Guide for Small Business

under the Internal Revenue Code.

actually control the interest.

505

Tax Withholding and Estimated Tax

•

Any other organization that elects to be

•

If capital is not a material in-

535

classified as a corporation by filing Form

Business Expenses

come-producing factor, they joined to-

8832.

537

gether in good faith to conduct a business.

Installment Sales

For more information, see the instructions for

They agreed that contributions of each en-

538

Accounting Periods and Methods

Form 8832.

title them to a share in the profits, and

544

Sales and Other Dispositions of

some capital or service has been (or is)

Limited liability company. A limited liabil-

Assets

provided by each partner.

ity company (LLC) is an entity formed under

551

state law by filing articles of organization as an

Basis of Assets

Capital is material. Capital is a material in-

LLC. Unlike a partnership, none of the members

925

Passive Activity and At-Risk Rules

of an LLC are personally liable for its debts. An

come-producing factor if a substantial part of the

946

How To Depreciate Property

LLC may be classified for federal income tax

gross income of the business comes from the

Publication 541 (December 2010)

Page 2

Form 541 - Partnerships - Department Of The Treasury - Internal Revenue Service - 2010 Page 2

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