General partnerships are recognized as legal entities by the Internal Revenue Service and like all legal entities, general partnerships are required to have an Employer Identification Number. An EIN, also known as a Taxpayer Identification Number, serves the same function as a Social Security number does for an individual. The IRS identifies people and entities by TINs and Social Security numbers even if the entity in questions has no tax burden.
The precise definition of a general partnership varies from state to state, but essentially partnerships are formed when two or more people decide to start an enterprise for the purpose of generating profits. Typically, people involved in general partnerships record the partnership agreement in writing, although in some states, including Texas and Iowa, partnerships can exist on the basis of a verbal agreement. However, the IRS requires partnerships to apply for an EIN and even in the absence of state paperwork, the EIN serves as a form of documentation to show that the partnership exists.
Pass Through Taxation
General partnerships are required to have TINs even though the entities are not required to pay taxes at the federal level. The entity must file an annual tax return, but profits and losses are passed onto the partners. Each partner must receive a schedule K1 tax form, which details their share in the partnership's profits and losses. The partners include the K1 form when they file their individual taxes and money reported on the form counts towards each individuals overall taxable income.
Many people believe that a sole proprietor can only add a spouse to a business by turning the sole proprietorship into a general partnership or some other kind of entity such as a corporation. Legally, the IRS allows spouses to effectively work as partners without having to form a legal business partnership or to apply for an EIN. The couple must file taxes jointly and list the business as a "qualified joint venture," rather than a partnership or other entity.
Changing an EIN
If one partner buys out the other and converts a general partnership into a sole proprietorship, the controlling owner must apply for a new EIN. If the partnership ceases to exist and then reforms, the partners must obtain a new EIN. The IRS also requires partnerships that incorporate to obtain a new EIN. If a partnership changes its name, adds partners, moves location or terminates, the members do not need to obtain a new EIN.