How your US Limited Partnership (LP) is taxed

"In this world nothing can be said to be certain, except death and taxes," the great American statesman Benjamin Franklin wrote back in 1789 in a letter to Jean-Baptiste Leroy. Sadly, the same goes for your US company: the better business is for you, the better it is for Uncle Sam.

The good news for established and aspiring US entrepreneurs: at the end of 2017, Congress passed the 2017 US tax reform (Tax Cuts and Jobs Act), which cut taxes on corporate profits sharply. Its core elements were made permanent by the One Big Beautiful Bill Act of July 4, 2025.

Until 2017, the US had the highest corporate tax rate of any major industrialized nation, at 35%. Since 2018 the federal rate has been 21% (IRC § 11), plus the corporate tax of the home state. That makes US business taxation more favorable than in much of Europe for many setups.

On this page you will find out which taxes to expect on the profits your US company earns.

1The basics of how LP profits are taxed

The US LP is the equivalent of the limited partnership familiar across Europe. It is a particularly good fit if you want to do business in the US through a partnership but avoid the legal uncertainty over how the tax authorities classify an LLC.

The LPs we form are trading partnerships whose profits are subject to US income tax at the partner level.

Because the US LP matches the limited partnership as a legal form, tax authorities at home can classify it easily, and the LP is reliably treated as a partnership in your home country.

An LP has a "General Partner", the partner with unlimited liability. This is usually an LLC or a corporation. The General Partner manages the LP.

There are also 1 to n "Limited Partners". Their liability is limited to their contribution, and they are not involved in managing the company unless they are given authority to act for it.

The company is tax-transparent: tax is paid at the partner level. The US tax burden is roughly 25% to 35%, depending on the profit and the industry. All partners must file a US tax return.

As a rule, you owe no further tax in your country of residence, although this depends largely on the tax treaty between that country and the US.

The LP must withhold 37% tax on distributions. The partner gets any overpaid tax back when filing the US tax return.

2Income tax

As mentioned above, the LP's profits are subject to US income tax at the partner level. Income tax is due at both federal and state level. 

2.1Federal income tax

Federal income tax brackets are as follows (single filers, tax year 2026):

• Income up to $12,400: 10%
• $12,401 to $50,400: 12%
• $50,401 to $105,700: 22%
• $105,701 to $201,775: 24%
• $201,776 to $256,225: 32%
• $256,226 to $640,600: 35%
• over $640,600: 37%

2.2State income tax

On top of the federal taxes above comes state income tax. It can be deducted from federal tax (the so-called SALT deduction, which is capped), but it is not credited against it.

These states levy no income tax (if you live there, you only pay federal taxes):

• Alaska
• Florida
• Nevada (Gross Receipts Tax from $4 million in revenue)
• New Hampshire (the former tax on interest and dividends was abolished as of 2025)
• Texas (Franchise Tax from $2.65 million in revenue)
• South Dakota
• Tennessee (the former Hall Tax on investment income was abolished as of 2021)
• Washington (but since 2022 a 7% tax on large private capital gains)
• Wyoming

Income tax in the other states ranges from 3% to 13%.

In 2026, top rates in the other states range from 2.5% in Arizona and North Dakota to 13.3% in California; on earned income, California adds a payroll levy that lifts the top rate to 14.6%. Fifteen states charge a flat rate with no brackets. For the current position in a given state, see our profiles of every US state.

2.3Gross Receipts Tax

LPs are partnerships, not corporations, so they pay no corporate tax even where the home state levies one.

But here's the catch:

Nevada, Ohio, Texas and Washington have no state corporate tax, but they do have a kind of turnover tax (Gross Receipts Tax) on a company's revenue, LPs included. In Texas the Franchise Tax is 0.375% (retail/wholesale) or 0.75% of the margin, with an exemption threshold of $2.65 million in annual revenue (report years 2026/2027). In Nevada the exemption is $4 million.

So if you expect revenue above the threshold in Texas or Nevada, it may be worth looking at forming in a state without a Gross Receipts Tax.

If you want to optimize for tax, form your LP in a state with no income tax and no Gross Receipts Tax. The top picks are Florida, South Dakota and Wyoming.

3Up to 20% tax deduction on LP profits

Since 2018, a deduction of up to 20% has applied to partnership profits (the Qualified Business Income Deduction under IRC § 199A, introduced with the 2017 US tax reform and made permanent by the One Big Beautiful Bill Act of 2025). The 2026 thresholds are $201,750 for single filers and $403,500 for married couples filing jointly (Rev. Proc. 2025-32).

This formula applies in full only to people with total taxable US income up to $201,775 (tax year 2026). If your annual share of partnership profit is higher, or other US income puts you over this limit, restrictions apply.

The deduction then depends on the total wages the business pays or on the investments it makes in the tax year.

Here's an example with a very high profit:

Further restrictions apply to certain service providers such as consultants, lawyers and doctors, who benefit from the lower rates only to a limited extent, to prevent abuse.

4Sales tax

States also levy sales tax, which is only partly comparable to VAT. It is not charged on services, only on the purchase of goods. Shipments to another state (mail order) were long tax-free; since the Wayfair ruling of 2018, however, remote sellers above certain revenue thresholds (usually $100,000 a year) must also collect sales tax in the customer's state.

There is no offsetting of input tax against output tax. However, resellers do not have to be charged sales tax (similar to the EU reverse charge). The sales tax collected is paid to the state monthly or quarterly.

Almost all local governments add their own sales tax on top. In California, for example, the state sales tax is 7.25%, and local governments add another 2% on average.

A European-style federal VAT has been debated for years. Experts say it could be 1-2%, but it would come on top of existing sales tax.

The following states levy no sales tax at all:

• Alaska
• Delaware
• Montana
• New Hampshire
• Oregon

Sales tax in the other states ranges from 5% to 9% (combined state and local rate).

In 2026, combined state and local rates average 7.53%, weighted by population. The highest are Louisiana at around 10.1%, Tennessee at 9.6%, Washington at 9.6%, Arkansas at 9.5% and Alabama at 9.5%. California has the highest state-only rate at 7.25%. Details are on our page on sales tax in the USA.

5Payroll taxes

The US has payroll taxes which, as is usual in Europe, are withheld directly by the employer and paid over to the IRS.

These are the payroll taxes:

• Pension insurance (Social Security): 12.4% on income up to $184,500 (2026). Split equally between employee and employer.

• Health care in old age (Medicare): 2.9% on total wages, split equally between employer and employee.

• Unemployment insurance (Unemployment Tax): levied at federal and state level. At federal level the employer pays 6% on the first $7,000 of annual wages per employee; after credit for state contributions this usually leaves 0.6%, so at most $42 (!) per year per employee. State rates vary widely. They depend on the industry and on how many of a business's employees claim benefits. In plain terms: if you cut jobs, your contributions go up. Rates for new employers are between 1% and 3% in every state. In some states they can rise to as much as 10%, but they only apply up to annual wages of around $40,000.

5.1Social security contributions for LP partners who are US tax residents

In addition to the standard income tax rates (see above) on LP income, LP partners who live in the US or are US tax residents also pay social security contributions, at the combined employer and employee rate. This is called "Self Employment Tax".

Social Security accounts for 12.4%, but only on income up to $184,500 (2026).

Medicare (health coverage in old age) costs 2.9%, with no income cap.

However, the self-employed can deduct 7.65% of taxable income before the tax due is calculated.

LP partners who do not live in the US or are only non-resident taxpayers there often still pay social security contributions on LP profits, at least if you live in a country that has a corresponding agreement with the US.

6Quick tax comparison of the states we recommend

The table below compares eight US metro areas we regularly suggest to clients as locations for their US business (and we support you in building your business anywhere in the US).

The table below shows the different tax rates in these states at a glance:

7Taking profits out of the LP

Once you have built a successful business in the US, the obvious question is how to get the profits out of the company. We have a whole page on this, which you can find here.

How we help you

• LLC and LP Tax ReturnForm 1065 and K-1 for your LLC or LP.
• Form a Limited PartnershipThe US LP for structures with a general partner and limited partners.
• Tax structureA clean structure between parent company and US subsidiary, or between you and your US company, coordinated with your accountant.
• Sales taxRegistration and returns in the states where you have nexus.
• US Tax ConsultationYour US tax question, answered by people who know both sides.