Form 541 - Partnerships - Department Of Treasury Internal Revenue Service

Withholding on foreign partner or firm. If a

A domestic LLC with at least two

TIP

Forming a Partnership

partnership acquires a U.S. real property inter-

members that does not file Form 8832

est from a foreign person or firm, the partnership

is classified as a partnership for fed-

may have to withhold tax on the amount it pays

eral income tax purposes.

The following sections contain general informa-

for the property (including cash, the fair market

tion about partnerships.

value of other property, and any assumed liabil-

Organizations formed before 1997. An or-

ity). If a partnership has income effectively con-

ganization formed before 1997 and classified as

Organizations Classified as

nected with a trade or business in the United

a partnership under the old rules will generally

Partnerships

States, it must withhold on the income allocable

continue to be classified as a partnership as long

to its foreign partners. A partnership may have to

as the organization has at least two members

An unincorporated organization with two or

withhold tax on a foreign partner’s distributive

and does not elect to be classified as a corpora-

more members is generally classified as a part-

share of fixed or determinable income not effec-

tion by filing Form 8832.

nership for federal tax purposes if its members

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

Community property. A husband and wife

carry on a trade, business, financial operation,

partnership that fails to withhold may be held

who own a qualified entity (defined later) can

or venture and divide its profits. However, a joint

liable for the tax, applicable penalties, and inter-

choose to classify the entity as a partnership for

undertaking merely to share expenses is not a

est.

federal tax purposes by filing the appropriate

partnership. For example, co-ownership of prop-

For more information, see Publication 515,

partnership tax returns. They can choose to

erty maintained and rented or leased is not a

Withholding of Tax on Nonresident Aliens and

classify the entity as a sole proprietorship by

partnership unless the co-owners provide serv-

Foreign Entities.

filing a Schedule C (Form 1040) listing one

ices to the tenants.

spouse as the sole proprietor. A change in re-

The rules you must use to determine

Comments and suggestions. We welcome

porting position will be treated for federal tax

whether an organization is classified as a part-

your comments about this publication and your

purposes as a conversion of the entity.

nership changed for organizations formed after

suggestions for future editions.

A qualified entity is a business entity that

1996.

You can write to us at the following address:

meets all the following requirements.

Internal Revenue Service

•

Organizations formed after 1996. An organi-

The business entity is wholly owned by a

Business Forms and Publications Branch

zation formed after 1996 is classified as a part-

husband and wife as community property

SE:W:CAR:MP:T:B

nership for federal tax purposes if it has two or

under the laws of a state, a foreign coun-

1111 Constitution Ave. NW, IR-6406

more members and it is none of the following.

try, or a possession of the United States.

Washington, DC 20224

•

No person other than one or both spouses

An organization formed under a federal or

would be considered an owner for federal

state law that refers to it as incorporated

We respond to many letters by telephone.

tax purposes.

or as a corporation, body corporate, or

Therefore, it would be helpful if you would in-

•

body politic.

The business entity is not treated as a

clude your daytime phone number, including the

•

corporation.

area code, in your correspondence.

An organization formed under a state law

that refers to it as a joint-stock company or

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

For more information about community prop-

joint-stock association.

asterisk must be included in the address.)

erty, see Publication 555, Community Property.

•

Please put “Publications Comment” on the sub-

An insurance company.

Publication 555 discusses the community prop-

ject line. Although we cannot respond individu-

•

erty laws of Arizona, California, Idaho, Louisi-

Certain banks.

ally to each email, we do appreciate your

ana, Nevada, New Mexico, Texas, Washington,

•

feedback and will consider your comments as

An organization wholly owned by a state

and Wisconsin.

we revise our tax products.

or local government.

•

Tax questions. If you have a tax question,

Family Partnership

An organization specifically required to be

visit or call 1-800-829-1040. We

taxed as a corporation by the Internal Rev-

cannot answer tax questions at either of the

enue Code (for example, certain publicly

Members of a family can be partners. However,

addresses listed above.

family members (or any other person) will be

traded partnerships).

recognized as partners only if one of the follow-

•

Ordering forms and publications. Visit

Certain foreign organizations identified in

ing requirements is met.

/formspubs to download forms and

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

•

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

tions.

If capital is a material income-producing

National Distribution Center at the address

factor, they acquired their capital interest

•

A tax-exempt organization.

shown under How To Get Tax Help in the back

in a bona fide transaction (even if by gift or

•

of this publication.

A real estate investment trust.

purchase from another family member),

actually own the partnership interest, and

•

An organization classified as a trust under

Useful Items

actually control the interest.

section 301.7701-4 of the regulations or

You may want to see:

•

otherwise subject to special treatment

If capital is not a material income-produc-

under the Internal Revenue Code.

ing factor, they joined together in good

Publication

faith to conduct a business. They agreed

•

Any other organization that elects to be

334

Tax Guide for Small Business

that contributions of each entitle them to a

classified as a corporation by filing Form

share in the profits, and some capital or

8832.

505

Tax Withholding and Estimated Tax

service has been (or is) provided by each

535

Business Expenses

For more information, see the instructions for

partner.

Form 8832.

537

Installment Sales

Capital is material. Capital is a material

Limited liability company. A limited liabil-

538

Accounting Periods and Methods

ity company (LLC) is an entity formed under

income-producing factor if a substantial part of

544

Sales and Other Dispositions of

state law by filing articles of organization as an

the gross income of the business comes from

the use of capital. Capital is ordinarily an

Assets

LLC. Unlike a partnership, none of the members

income-producing factor if the operation of the

of an LLC are personally liable for its debts. An

551

Basis of Assets

LLC may be classified for federal income tax

business requires substantial inventories or in-

925

Passive Activity and At-Risk Rules

purposes as either a partnership, a corporation,

vestments in plants, machinery, or equipment.

or an entity disregarded as an entity separate

946

How To Depreciate Property

from its owner by applying the rules in regula-

Capital is not material. In general, capital is

See How To Get Tax Help near the end of

tions section 301.7701-3. See Form 8832 and

not a material income-producing factor if the

this publication for information about getting

section 301.7701-3 of the regulations for more

income of the business consists principally of

publications and forms.

details.

fees, commissions, or other compensation for

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Form 541 - Partnerships - Department Of Treasury Internal Revenue Service - 2006 Page 2

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