In its' most simple form, a partnership is two sole proprietors joined together to share profits and losses equally. Although partners do not receive salaries, as such, there is a distinction between payments for services and operating profit. Payments for services are called guaranteed payments. The remainder of profits after payments to partners for services rendered is divided amongst the partners based on their ownership share. Guaranteed payments are always subject to self-employment tax.
Operating profits are subject to self-employment tax for general partners.
Limited partners are not subject to self-employment tax on operating profits in excess of payments for services. In Texas, this amounts to a four and one half percent state income tax on operating profit. In a partnership both service and operating profits are taxable income to the owners. In any corporation, compensation for services must be handled as payroll. Operating profits allocated to the shareholders are not subject to self-employment tax.