How Formed? An informal association is a relationship by which separate businesses share ideas, customers (referrals), or expenses, but typically not profits. To escape liability as a general partnership, customers and clients must not be confused about the relationship or rely on the relationship being a partnership. Co-tenancies (undivided interests in property) are commonplace for purely passive investments, such as an apartment building managed by a third party. Regulations §301.7701-1(a)(2) provides:

"A joint venture or other contractual arrangement may create a separate entity for federal tax purposes if the participants carry on a trade, business, financial operation, or venture and divide the profits therefrom. For example, a separate entity exists for federal tax purposes if co-owners of an apartment building lease space and in addition provide services to the occupants either directly or through an agent. Nevertheless, a joint undertaking merely to share expenses does not create a separate entity for federal tax purposes. For example, if two or more persons jointly construct a ditch merely to drain surface water from their properties, they have not created a separate entity for federal tax purposes. Similarly, mere co-ownership of property that is maintained, kept in repair, and rented or leased does not constitute a separate entity for federal tax purposes. For example, if an individual owner, or tenants in common, of farm property lease it to a farmer for a cash rental or a share of the crops, they do not necessarily create a separate entity for federal tax purposes."

When done properly, an association that is not a partnership will limit your liability for acts done by your co-owners, and will eliminate the necessity for filing separate entity-level income tax or information returns. But it's easy to slip, so be careful.

Taxation. Generally taxed as if no entity existed. If this treatment is desired, and there is lingering doubt that the relationship might be treated as a partnership for tax purposes, or the relationship is one commonly referred to as an "investing partnership," or the persons involved are participants in the joint production, extraction, or use of property under an operating agreement, there are income tax regulations (Regs. Sec. 1.761-2) to "elect out" of partnership treatment under the Internal Revenue Code.