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If a taxpayer is in business with other people and all of them share the expenses and profits (even unequally), the IRS deems these people to be in a partnership. This is true whether the parties have entered a formal agreement or not. Consequently, the business must file a yearly partnership tax return (Form 1065). In addition to individual tax returns, the taxpayer and the other people involved in the business must file Form 1065, the annual partnership tax return. A formalized partnership agreement will not affect a taxpayer’s tax status, but it is a good idea to consult an attorney and to prepare a partnership agreement in order to clarify the various partners’ rights and responsibilities in the business.

Inside Partnerships