Final answer:
Partnerships are taxed under both the entity and aggregate approach, where partners pay taxes on their share of the income on their personal tax returns, and the partnership files an informational return. The partnership structure combines ease of management and the ability to raise more capital than a sole proprietorship, without special taxes at the entity level.
Step-by-step explanation:
Partnerships are taxed under both the entity and aggregate approach. Under the aggregate approach, each partner is taxed on their share of the partnership's income, as if they directly own the assets and liabilities of the business. Each partner reports their share of profits and losses on their personal tax returns and pays the respective tax. This aspect of taxation reflects the fact that partnerships are subject to little government regulation and help illustrate the flexibility of the partnership as a business organization.
In contrast, the entity approach recognizes the partnership as a separate entity for certain tax purposes. However, unlike corporations, a partnership itself does not pay federal income taxes. Instead, it files an informational return (Form 1065 for the U.S.) that reports its income and losses. This approach can make it easy to attract investors, as they can readily assess the partnership's performance.
A general partnership involves two or more people in ownership and management, which can raise more capital than a sole proprietorship due to pooling resources. Additionally, a partnership offers efficiencies in management and the potential for growth, as it can introduce new technology, generate change, and as it expands, provide additional jobs.