Articles

Partnership Tax Treatment Just Got Easier

On January 1, 1997, the so-called "check-the-box" federal tax regulations became effective. This classification system should greatly simplify the system for determining whether a business entity will be taxed as a partnership or as a corporation. Under these new rules, all entities, except for those automatically classified as corporations, will be classified as partnerships unless an affirmative election is made to be treated as a corporation. Special rules apply to one-person entities.

These regulations should eliminate the need for taxpayers to artificially shape business organizations to produce the desired entity classification. They should allow unincorporated entities, such as limited liability companies ("LLCs") and limited liability partnerships ("LLPs"), to easily obtain the limited liability protection and other desirable corporate characteristics while still retaining the desired partnership taxation.

Corporations formed pursuant to state law must be taxed as a corporation. One-person entities will be disregarded for tax purposes and will be taxed basically as sole proprietorships unless the owner affirmatively elects to be taxed as a corporation. Entities with two or more members, and which are not automatically classified as corporations, will be taxed as partnerships unless they affirmatively elect to be treated as corporations by filing a special form.

As a result of the new regulations, and the flexibility provided by state statutes dealing with the organizational provisions of LLCs and LLPs, taxpayers should be able to achieve favorable partnership tax classification for their LLCs and LLPs that are in all meaningful respects almost identical to corporations. §