Partnership Characteristics

• In some states assets that are transferred into the partnership by the partners are considered co-owned by all the partners. In other states the partnership is a separate entity, and as such, owns its own assets. No one partner has a claim against a specific asset.

• The lifetime of a partnership is generally limited by the lifetime of each of the partners.

• A partner can bind the other partners to a contract as long as the act is within the scope of the partnership’s field of business.

• Each partner is personally liable for all partnership liabilities.

A partnership can elect to be treated as a corporation for federal tax purposes.

Exclusion From Partnership Treatment

Certain investing and operating agreement partnerships that have no active conduct of a business may choose to be excluded from being treated as a partnership for federal income tax purposes. [Reg. §1.761-2]

Investing Partnership: A group whose members:

• Jointly purchase and sell investment property,
• Own the property as co-owners,
• Reserve the right separately to take or dispose of their shares of any property acquired or retained,
• Do not actively conduct business, and
• Do not irrevocably authorize some person to purchase, sell, or exchange the investment property. A member may delegate someone to act for his/her account for a period of not more than one year.

Operating Agreement Groups: Have members who participate in the joint production, extraction, or use of property, and: 

• Own the property as co-owners,
• Reserve the right separately to take in kind or dispose of their shares of any property produced, extracted, or used, and
• Do not jointly sell services or the property produced or extracted, although a member may delegate authority to sell his/her share of the property produced for his/her account for a period not to exceed one year.

Advantages of Electing Out of Partnership Status:

• Elections are made at the individual level rather than at the partnership level,
• A partnership tax return is not required, and
• Members do not have to depend on the partnership to give proper tax treatment to various items.

To Make the Election: Attach a statement to a blank Form 1065 Partnership Return and file by the due date (including extensions) of the partnership tax return. 

The statement must contain:

1) Name and address of the organization,
2) Names, addresses, and taxpayer I.D. numbers of all members,
3) Statement that the organization qualifies as an Investing Partnership under Regulation §1.761-2(a)(2); or as an Operating Agreement Group under §1.761-2(a)(3),
4) Statement that all members of the organization consent to be excluded from Subchapter K, and
5) Contact name and address where information may be obtained about the written or oral operating agreement.

Once the election is made, it cannot be revoked without IRS consent, unless the organization ceases to qualify. If the organization begins to operate an active business, the election is revoked and the partnership must begin to file Form 1065.