How can you structure a tax-efficient partnership agreement?

The problem with this iteration of AI - is that is tries to provide answers without asking the right questions. There are lots of reasons a client might want a ‘partnership’. A legal partnership may be only one of many options (corporate structures can be treated as partnerships for tax purposes). More generally, what is tax efficient will depend on the jurisdiction of the partners, the nature of the partnership activities and the individual circumstances of the deal. The question posed is far too general to give any sort of helpful answer in the abstract.

Obvious answer is get to a lawyer, because no one sharing advice here is qualified to tell you the legal implications. Where you live is so key to any partnership, and where is the nexus, meaning where does the contract originate. I live in California, with way too many rules and legalities, so anyone going into a partnership with someone in this state might want it to originate in their state. And where does the partnership reside, what state or country? These 2 elements are crucial, as any legal disagreements later will be settled in the court where the partnership, and nexus of this agreement, resides. That's a big deal. Liability is key here, general partnerships leave you exposed. LLCs are usually used even though inconvenient.

As Joel wrote - the question is far too general and actually confuses partnerships like in "business partnership between two companies" with "partnership as an option to set up a joint business", e.g. of lawyers.

When setting up your partnership, focus on making the tax side work for you. Clearly spell out how profits will be shared and take advantage of any tax benefits for partnerships. Make sure everyone knows their roles, how money is divided, and understand the tax impact. This way, you can keep things simple and maximize tax efficiency.

Partnerships are flexible vehicles through which business can be structured but the question posed is to general to comment in detail. Tax should not be the center focus when establishing a partnership.

There are Internal Revenue Code sections that restrict the allocation of profits and losses and other tax items among the partners, generally requiring that the tax allocation reflect reality.

From the UK perspective allocation of profits must be in line with the partnership agreement, a variation can lead to other tax complications for the partner giving up a right.

On the other hand, if you participate in the management of the partnership, you may be subject to the self-employment tax, adding approximately 13% to your regular tax on the profits of the partnership.

Keep in mind, if you are a passive partner, you have to look beyond basis to determine whether your losses are deductible. The hierarchy to determine is basis, at-risk AND passive activity loss limitations. Also debt basis is not mentioned here, but it is a factor for loss deductibility. However even if a passive partner has sufficient basis, they can not deduct passive losses that exceed the Passive Activity Loss Limitations.

Always speak to a qualified tax professional before making decisions on distributions, withdrawals and/or liquidation of a partnership interest. Because contribution of property is a non-taxable event, certain distributions can trigger tax consequences (ex: Disguised Sales).

The biggest challenge here is the question, "tax efficient", you've got two or more partners, so efficiency begins there. What works for both or more of you? Where are you physically located, either state or country matters greatly. Plus who does the paperwork and filings? Usually it's good to have a 3rd party, but again that adds cost. Though it hopefully makes the filings legitimate, it's easy to play games in partnerships by less than trustworthy partners. Be super careful and pick out what tax benefits are available, what's challenging to your agreement, who does what especially in terms of filing and legal paperwork. Most of all, do this through an attorney, which I am not and this is not legal advice.

Involve an attorney who specializes in these matters. Because entities are organized at the state level, certain permissible items for federal taxation may be disallowed under state laws for certain entities. Taxation is only one consideration, liability risk is another.