I've been in a Partnership LLC with three others for the last 7.5 years. While I was a Limited Partner in the first two years on a provisional basis, I've been a full General Partner ever since. I attend and contribute to the monthly partner meetings, and I am in charge of multiple aspects of the way the business is run. I noticed that my K-1 this year said Limited Partner, so I looked it up. It seems that our CPA forgot to switch me several years ago. I realize there are liability advantages to staying as a Limited Partner, but from what I've read, if something disastrous were to occur, I could easily be proven to be a General Partner in court, despite what it says on my tax forms. My income calculation uses the exact same method as my other partners, so I don't see that changing with the switch. Is it worth it for me to inform our CPA to change me over next year? Are there any advantages to this, or is it only really accomplishing some bookkeeping accuracy?
A few comments on your questions:
- You stated that the entity is an LLC treated as a partnership.
- There are clear legal distinctions between a true partnership and an LLC treated as a partnership.
- An LLC NEVER has a general partner.
- While the box on the K-1 may be the same for general partner or member-manager, that distinction for tax purposes is strictly related to treating any income as subject to self-employment tax.
- Since you are actively involved in the business, when answering the questions in TT, make sure you indicate that you materially participate. This should prompt TT to properly subject all your income from this entity as subject to self-employment.
- Additionally, hopefully the preparer of the LLC return properly reflected all the income in box 14 with a code A.
- Make sure you follow-up with the preparer so they can make a note in the file to adjust this next year.
Looking at it again, the two boxes are "General partner or LLC member-manager" and "Limited partner or other LLC member." All three of my other partners have the first box checked while I have the 2nd. I contribute just as much to the management that they do, so it sounds like the correct box for me is the first one. My income is otherwise reported the same as the others. From what I can tell, having the wrong box checked doesn't change my taxes owed or anything else.
I guess my question remains, is it worthwhile to call the office's CPA to make sure it's changed in the future? Is there any advantage or disadvantage to leaving it or changing it?
Yes it is worthwhile to let your tax professional to make the change for future returns.
However, as noted previously, you need to make sure that your box 14 code A has the correct figure in it. This may require a call to the tax professional.