An unincorporated business with two or more owners is generally classified as a partnership. Aside from the requirement of having at least two partners there are no legal requirements to form a general partnership. However, having a written partnership agreement is recommended. A partnership agreement provides a blueprint for how the partnership will be run, the financial obligations of the partners, and how profits and losses will be divided. In a partnership, each partner simply contributes money, property, labor, or skill and share the work and divide the profits. If there are losses, those are shared as well.
There are many different types of partnerships (general partnership, limited partnership, and limited liability partnership) but they all report its income in the same manner. A partnership does not pay income tax on its income but it must file an information return on form 1065, U.S. Return of Partnership Income to notify the Internal Revenue Service of its income, losses, deductions and other items. The 1065 is purely informational. The partnership gives each partner a Schedule K-1 (Form 1065), Partner’s share of income, deductions, credits, etc. showing the partner’s share of the partnership net income, loss and other items and the partner reports these amounts on the personal income tax return along with the partner’s other income. To summarize, a partnership is a pass-through entity and the profits, losses, deductions, and other items are passed through to the individual partners and taxed at their individual tax rates.