3 Ways Partnerships Give Your Tax Strategy Maximum Flexibility

Partnerships are extremely flexible entities which makes them incredibly powerful in a tax strategy. Flexibility in a tax strategy is key because things change! I've studied partnerships for over 30 years and there are hundreds of ways to use them to provide maximum flexibility. I've picked 3 of my favorites to share here.

Here is a common scenario I see in businesses with more than one owner.

When the business starts, the owners have a profit sharing structure in mind, let's say it's 50/50. Then, a few years down the road, the owners have a need to change their profit sharing structure - maybe their roles have changed or perhaps one wants to work less.

In a corporation (whether it's an S Corporation or C Corporation), changing the profit structure is not a straightforward process and can often result in increased taxes to one or more of the owners. However, in a partnership, the profit sharing structure can be changed very easily - without an increase in taxes to the owners!

#2 Flexibility with Your Assets

The most common entity used to own real estate (or other investment type assets) when there is more than one owner is a partnership. Why is this? There are actually several reasons but the reason you may not hear most often is because a partnership provides tremendous flexibility.

There is flexibility in being able to take losses. This is very important with rental real estate which often has losses due to depreciation deductions. While losses can be taken in S or C Corporations, it can be much more challenging for the owners of these types of entities to get the immediate tax benefit from the losses.

There is also flexibility in being able to transfer assets out of the partnership without any tax consequence. A partnership can distribute an asset (or assets) to its partners and there is typically no tax impact to the partnership or the partners. This same transaction in an S or C Corporation typically results in the owners paying more tax.

#3 Flexibility with Your Estate Planning

Partnerships are regularly used in estate tax planning because of the flexibility they provide. One of the main goals of estate tax planning is to move the value of your assets outside of your estate so the value is not included in your estate and your estate tax is minimized. However, at the same time, you want to have access and control of these assets during your lifetime.

A partnership provides the flexibility to accomplish this. Here's an example of one way this can be done with a partnership.

You set up a partnership and put yourself in control of the partnership. You then transfer some of your assets to the partnership and gift part of the ownership in the partnership to your beneficiaries. This moves a portion of the value of the assets out of your estate, but you still control the partnership (and all of the assets in the partnership).

Create Flexibility in Your Tax Strategy

Flexibility is key to creating a tax strategy that continually reduces your taxes, even when your situation changes. Partnerships are a powerful tool to create flexibility - particularly when you own a business (or invest) with someone other than your spouse.