The business owners need not have a formal organizing document (although they should).2 Hence, if a sole proprietor takes in a partner and doesn't formally organize any other form of business entity, the result is a partnership, because a can have only one owner.
Typically, each person in a partnership contributes money, property, labor or skill, and expects to share in the profits and losses of the business.
Although a partnership must file an annual information return, , “U.S. Return of Partnership Income,” to report the income, deductions, gains, losses, etc., from its operations, it does not pay income tax. Instead, it “passes through” any profits or losses to its partners. Each partner includes his or her share of the partnership's income or loss on his or her tax return. (See also .)
Partners are not employees and hence the partnership does not issue a Form W-2 to the partners. However, the partnership must give each partner a copy of the partnership's , “Partner's Share of Income, Deductions, Credits, etc.” of IRS Form 1065.
A disadvantage of using a partnership is that partners are not eligible for tax-favored fringe benefits.
Husband-and-wife business. Because a legal partnership can be created without formal organizing documents, a husband-and-wife business could be treated as a partnership,3 even if that is not their intention or in their best tax interests. (See also .)
1 IRC Sections 761(a), 7701(a)(2).
2 Reg. Section 1.761-1(c) (partnership agreement may be oral).
3 IRS Publication 541, “Partnerships” (Dec. 2010), page 3.