An ABI Committee Newsletter
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| Vol 20, Num 1 | March, 2026
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by Damon Yousefy, Alvarez & Marsal, Dallas
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Partnerships are a commonly used structure for investment funds, particularly in private equity, hedge funds and real estate. Investment funds may choose being in a partnership for a number of reasons, including:
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- Pass-Through Taxation: Partnerships are not taxed at the entity level. Income deductions and credits "pass-through" to partners, who report them on their individual tax returns, avoiding double taxation and allowing for more efficient tax outcomes for profitable businesses.
- Flexibility in Allocations: Partnerships allow for tailored economic arrangements, as partners can generally agree to allocate, losses and distributions in ways that reflect their economic deal.
- Capital Account Management: Partners' capital accounts can be used to track each partner's share of the partnership, since these accounts are adjusted for contributions, distributions and allocations of income or loss, and are central to determining tax and economic
entitlements.
- Preferred Returns and Carried Interest: Partnerships can support complex structures like preferred returns to investors and carried interest to fund managers.
- Entity vs. Aggregate Theory: U.S. tax law treats partnerships under a hybrid model:
- Entity Theory: The partnership is treated as a separate entity for some purposes.
- Aggregate Theory: The partnership is viewed as a collection of partners for others. This duality allows for nuanced tax-planning.
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