There are two types of partnerships, both of which will report on the same federal form: Form 1065. The two types of partnerships are general partnerships and limited partnerships (LP).
You don’t see many general partnerships these days, or at least I hope you don’t! That’s because the general partnership doesn’t provide any asset protection at all. Each partner has full liability for anything the company does, he/she does and his/her partner does.
The limited partnership has two classes of partner: general partners and limited partners. There must be at least one of each in order for a partnership to exist. The general partner has full liability and operates the company. The limited partner only has risk equal to the amount he/she has invested. And the limited partner can not manage the company.
An LLC that has more than one owner (a multi-member LLC) is taxed like a partnership unless a tax election is made to be taxed in another form like an S Corporation or C Corporation. An LLC has two different forms of management: member-manager and manager-managed. The LLC files on Form 1065 unless it’s a single member LLC or has elected to be taxed as an S or C Corporation.
There are a couple of things to be concerned about. First, if there is a loss, is it passive, non passive, active or material?
If you have a business, there is still a possibility that the loss may be passive, especially if your only ownership is as a limited partner. New regulations released by the IRS at the end of 2011 state that if you hold a business or investments inside a partnership and your only ownership share is as a limited partner, you have passive income/expense. If you want to convert that to nonpassive, active or material, you’ll need to additionally pick up a general partnership share and become active in management.
If you have an LLC, the same issue occurs if the LLC is formed as member-managed and you haven’t been named as a manager for the LLC. In that case, it’s passive. Best practice is to change this to a manager-managed and make yourself one of the named managers.
If you’ve got a limited partnership or member-managed LLC with a loss, expect some IRS scrutiny. That’s a big red flag right now.