Aggregate Theory

Aggregate theory of partnership is a theory which states that a partnership does not have a separate legal existence such as a corporation. Under the aggregate theory of partnership, the partnership is only the totality of the partners who make it up. According to this theory, each partner is treated as the owner of a direct and undivided interest in partnership assets, liabilities, and operations and is not viewed as a taxpaying entity. Tax is actually paid at the partner level. Partners are treated as a group of individual sole proprietorships for the purpose of tax rules that provide separate elections or limitations, such as IRC section 108 cancellations of debt (COD) income exclusions, itemized deductions, and tax preferences. All partners, under this theory, individually report their respective shares of income and deductions.

Entity approach

The entity approach to partnerships views the partnership as a separate and distinct entity against which tax liabilities can be assessed and to which each partner has a piece of ownership. With this approach, partnerships begin to feel a lot more like a corporation for tax purposes. While the theory of this approach is not so often used in the context of partnership taxation, it is certainly not absent. For example, partnerships maintain some level of distinction for tax purposes in the sense that each partnership has its own separate reporting period, separate calculation of basis in assets, and separate methods of accounting. Thus, even though the results of the operation of a partnership ultimately are divided and distributed to each partner, the aforementioned issues are addressed by the partnership itself and impact the results that are entered on the partnerships.

why is it important for all partners in a partnership to be on the same page in regard to the method used? What happens if they can not agree?