Form 541 - Partnerships - Department Of Treasury Internal Revenue Service

Withholding on foreign partner or firm. If a

section 301.7701-3 of the regulations for more

partnership acquires a U.S. real property inter-

Forming a Partnership

details.

est from a foreign person or firm, the partnership

A domestic LLC with at least two mem-

may have to withhold tax on the amount it pays

TIP

The following sections contain general informa-

bers that does not file Form 8832 is

for the property (including cash, the fair market

tion about partnerships.

classified as a partnership for federal

value of other property, and any assumed liabil-

income tax purposes.

ity). If a partnership has income effectively con-

Organizations Classified as

nected with a trade or business in the United

Partnerships

States, it must withhold on the income allocable

Organizations formed before 1997. An or-

to its foreign partners. A partnership may have to

ganization formed before 1997 and classified as

An unincorporated organization with two or

withhold tax on a foreign partner’s distributive

a partnership under the old rules will generally

more members is generally classified as a part-

share of fixed or determinable income not effec-

continue to be classified as a partnership as long

nership for federal tax purposes if its members

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

as the organization has at least two members

carry on a trade, business, financial operation,

partnership that fails to withhold may be held

and does not elect to be classified as a corpora-

or venture and divide its profits. However, a joint

liable for the tax, applicable penalties, and inter-

tion by filing Form 8832.

undertaking merely to share expenses is not a

est.

Community property. A husband and wife

partnership. For example, co-ownership of prop-

For more information, see Publication 515,

who own a qualified entity (defined later) can

erty maintained and rented or leased is not a

Withholding of Tax on Nonresident Aliens and

choose to classify the entity as a partnership for

partnership unless the co-owners provide serv-

Foreign Entities.

federal tax purposes by filing the appropriate

ices to the tenants.

partnership tax returns. They can choose to

The rules you must use to determine

Comments and suggestions. We welcome

classify the entity as a sole proprietorship by

whether an organization is classified as a part-

your comments about this publication and your

filing a Schedule C (Form 1040) listing one

nership changed for organizations formed after

suggestions for future editions.

spouse as the sole proprietor. A change in re-

1996.

You can write to us at the following address:

porting position will be treated for federal tax

Internal Revenue Service

purposes as a conversion of the entity.

Organizations formed after 1996. An organi-

Business Forms and Publications Branch

A qualified entity is a business entity that

zation formed after 1996 is classified as a part-

SE:W:CAR:MP:T:B

meets all the following requirements.

nership for federal tax purposes if it has two or

1111 Constitution Ave. NW, IR – 6526

•

The business entity is wholly owned by a

more members and it is none of the following.

Washington, DC 20224

husband and wife as community property

•

An organization formed under a federal or

under the laws of a state, a foreign coun-

state law that refers to it as incorporated

We respond to many letters by telephone.

try, or a possession of the United States.

or as a corporation, body corporate, or

Therefore, it would be helpful if you would in-

•

No person other than one or both spouses

body politic.

clude your daytime phone number, including the

would be considered an owner for federal

•

area code, in your correspondence.

An organization formed under a state law

tax purposes.

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

that refers to it as a joint-stock company or

•

asterisk must be included in the address.)

The business entity is not treated as a

joint-stock association.

Please put “Publications Comment” on the sub-

corporation.

•

An insurance company.

ject line. Although we cannot respond individu-

•

ally to each email, we do appreciate your

For more information about community prop-

Certain banks.

feedback and will consider your comments as

erty, see Publication 555, Community Property.

•

An organization wholly owned by a state

we revise our tax products.

Publication 555 discusses the community prop-

or local government.

erty laws of Arizona, California, Idaho, Louisi-

Tax questions. If you have a tax question,

•

ana, Nevada, New Mexico, Texas, Washington,

An organization specifically required to be

visit or call 1-800-829-4933. We

and Wisconsin.

taxed as a corporation by the Internal Rev-

cannot answer tax questions at either of the

enue Code (for example, certain publicly

addresses listed above.

Family Partnership

traded partnerships).

Ordering forms and publications. Visit

•

Certain foreign organizations identified in

/formspubs to download forms and

Members of a family can be partners. However,

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

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

family members (or any other person) will be

tions.

one of the three addresses shown under How To

recognized as partners only if one of the follow-

•

Get Tax Help in the back of this publication.

A tax-exempt organization.

ing requirements is met.

•

A real estate investment trust.

If capital is a material income-producing

Useful Items

factor, they acquired their capital interest

•

An organization classified as a trust under

You may want to see:

in a bona fide transaction (even if by gift or

section 301.7701-4 of the regulations or

purchase from another family member),

otherwise subject to special treatment

Publication

actually own the partnership interest, and

under the Internal Revenue Code.

❏ 334

Tax Guide for Small Business

actually control the interest.

•

Any other organization that elects to be

•

❏ 505

Tax Withholding and Estimated Tax

If capital is not a material in-

classified as a corporation by filing Form

come-producing factor, they joined to-

❏ 535

8832.

Business Expenses

gether in good faith to conduct a business.

❏ 537

For more information, see the instructions for

Installment Sales

They agreed that contributions of each en-

Form 8832.

title them to a share in the profits, and

❏ 538

Accounting Periods and Methods

some capital or service has been (or is)

Limited liability company. A limited liabil-

❏ 544

Sales and Other Dispositions of

provided by each partner.

ity company (LLC) is an entity formed under

Assets

state law by filing articles of organization as an

❏ 551

Basis of Assets

LLC. Unlike a partnership, none of the members

Capital is material. Capital is a material in-

of an LLC are personally liable for its debts. An

come-producing factor if a substantial part of the

❏ 925

Passive Activity and At-Risk Rules

LLC may be classified for federal income tax

gross income of the business comes from the

❏ 946

How To Depreciate Property

purposes as either a partnership, a corporation,

use of capital. Capital is ordinarily an in-

See How To Get Tax Help near the end of

or an entity disregarded as an entity separate

come-producing factor if the operation of the

this publication for information about getting

from its owner by applying the rules in regula-

business requires substantial inventories or in-

publications and forms.

tions section 301.7701-3. See Form 8832 and

vestments in plants, machinery, or equipment.

Page 2

Publication 541 (April 2008)

Form 541 - Partnerships - Department Of Treasury Internal Revenue Service - 2008 Page 2

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