Entity Theory of Partnership Law and Legal Definition
Entity theory of partnership refers to the theory that a partnership is an entity with a legal existence apart from its partners. Pursuant to the Uniform Partnership Act, a partnership is an entity distinct from its partners. Under the Entity Theory, the amount and character of partnership income is determined at the partnership level. Also, according to the entity theory, the partnership has its own tax year and chooses its own accounting methods. This consists of income tax elections such as accounting method and other initial year elections. The income tax elections bind the partnership and partners. Further, taxable transactions shall be conducted between the partner and partnership.