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Pros and Cons of Maryland General Partnerships

Maryland's partnership laws allow creation of either a general partnership, in which all partners are liable for the debts of the business, or a limited partnership, in which only the general partners are liable for debts, while the liability of limited partners is limited to the amount they have invested, in general. State law also allows for the creation of a limited liability partnership, in which no partner has personal liability (subject to certain exceptions) and for a limited liability limited partnership, which is a limited partnership that also elects limited liability partnership status.

Partnerships, as entities, are not subject to state income tax in Maryland. Instead, the income or losses of the partnership, as allocated among the partners, must be reported on the personal income tax returns of the individual partners (or on the corporate tax returns of any corporate partners).

Partnerships are required to file an annual tax information return, Form 510, with the state and partnerships that have nonresident partners may be required to withhold state income tax and make quarterly estimated tax payments on behalf of the nonresident partners. For more information on Maryland taxation of partnerships, please see the website for the Comptroller of Maryland.

Following are the Pros and Cons of operating as a Maryland General Partnership:


PROs:

• No Management Restrictions: Unless otherwise restricted by a partnership agreement, all partners in a general partnership have agency authority for the partnership and may undertake any management operation of the business, such as hiring employees, borrowing money, or entering into contracts on behalf of the partnership;
  
  
• Flexible Asset Control: Unless otherwise restricted by a partnership agreement, withdrawing money or other assets from of a general partnership is less complicated than with a corporation, and usually no serious tax or legal consequences result from withdrawing assets out of a partnership;
  
  
• Favorable Income Tax Treatment for Partners: Similar to a sole proprietor, a partner of a general partnership is not generally considered an employee of the partnership for income tax and payroll tax purposes. The income tax advantages and disadvantages of a sole proprietorship are equally applicable to a partnership because each partner's share of income from a partnership is treated essentially the same as income from a sole proprietorship;
  
  
• No Entity Level Taxation: While a partnership must file federal and usually state information returns -- Form 1065 is the federal form -- it generally pays no income tax. Instead, the partnership reports each partner's share of income or loss on the information return, and each partner reports the income or loss on Schedule E of his or her individual income tax return, Form 1040. In addition, partnerships are required to file a special report, Form 8308, with the IRS each time a sale or exchange of an interest in the partnership occurs, if the transaction involves a transfer of partnership interests for unrealized receivables (very broadly defined) or inventory; and
  
  
• Partnership Tax losses May be Deductible by the Partners: Partners in a partnership, unlike shareholders of a C corporations, may deduct their share of the tax losses of the business, if any, subject to various limitations that generally do not apply if the partnership carries on an active business in which the partner is actively engaged. While S corporation shareholders can also deduct losses, their losses are limited to the amount of their investment (basis of their stock and any loans they make to the company) in the S corporation.
  
  

CONs

• Taxable Year Issue: Unlike C corporations, partnerships are generally not allowed to use a fiscal year for tax purposes. Instead, they must report on a calendar-year basis. Those partnerships that are allowed to use a fiscal tax year are required to report and pay income taxes directly if the use of a fiscal year would otherwise result in a tax-deferral benefit to its partners, so any such tax benefit of deferral is taken away;
  
  
• Personal Liability for Partners: Each partner of a general partnership (other than an LLP) has personal liability for the debts, taxes, and other claims against the partnership. If the partnership's assets are not sufficient to pay creditors, the creditors can satisfy their claims out of your personal assets. In addition, when any partner fails to pay personal debts, the partnership's business may be disrupted if his or her creditors proceed to satisfy their claims by seeking what is called a charging order against partnership assets;
  
  
• Lack of Perpetual Existence: Unless otherwise provided in a partnership agreement, a general partnership usually terminates when any partner dies or withdraws from the partnership. This is in contrast to a corporation, which has perpetual existence under Maryland law; and
  
  
• Sale of the business or a Partner's Interest May not Qualify for Capital Gains Treatment: Unlike the sale of stock in a corporation, which usually will qualify for favorable capital gains tax treatment, sale of a partnership interest, or of the entire partnership business, may only qualify in part (or in some cases not at all) as a capital gain.

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