Partnerships and trusts are attractive because of their flow-through system. However, there are some distinctive differences between the two.
Partnership & Trust?
Like a corporation, a trust is a legal separate entity. However it’s use is different from a corporation due to its flow-through function as a business structure. For family offices and investment management businesses, a trust might be an ideal structure because income to beneficiaries can be deducted from the trust’s income. The paid income will then be taxed in the beneficiary’s hands, effectively working as a flow-through system. As a result, a trust investor will only pay one tax.
Partnership Differences
Unlike a trust, a partnership is not a separate legal entity. For partnerships, taxable income needs to be calculated and allocated to each partner. As a result, a partnership is also a flow-through system where the partner will only pay one tax, if the partner is an individual. The sale of of partnership usually results in the disposition of of capital property and therefore a capital gain or loss. The gain or loss will then be allocated the partners according to their proportions of the partnership. While an interest in a cooperation represents a share, an interest in the partnership is more like a right. Each partner does not own anything but the right to use the capital properties.