Family limited partnership was set up in 2013, with an LLC formed to be designated General Partner and family members to be Limited Partners. However, the accountant I used for my tax preparation in 2013 insisted that I was the GP, not a limited partner. So I have been issuing K1 firms with incorrect partnership designation all these years, exposing myself to liability based on the ignorance of the accountant. I can correct this on the 2017 K1 forms I'm doing now, but should I amend prior year 1065s for this partnership and file amendments with IRS to be on the safe side? Thank you
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Got it.
Edit [This answer was technically correct based on original facts, however, those facts changed and so parts of this response was updated in comments above]
This will be a somewhat long response, however, I think it is important to understand the reasoning and the ultimate end result.
All limited partnerships are formed under the applicable state statutes. States will follow either the Uniform Limited Partnership Act (ULPA) or the Revised Uniform Limited Partnership Act (RULPA).
Regardless of which Act the state follows, all limited partnerships MUST have at least one general partner that bears personal liability for partnership obligations.
So in your case, you set up an LLC owned by you, which by default is a disregarded entity under the check-the-box regulations.
Any entity who is required to file an information return with the IRS should be obtaining a form W-9 from all taxpayers. In this case, the partnership would be requesting these from the partners.
For the GP, the W-9 instructions are not the model of clarity, but in the end, the IRS indicates it "encourages" the use of a SSN when the entity is disregarded and owned by an individual.
Having said that, it is really a moot issue who you use for the GP in your case. This is because whether you reflect the single member LLC and its EIN or you individually and your SSN, at the end of the day:
Got it.
Edit [This answer was technically correct based on original facts, however, those facts changed and so parts of this response was updated in comments above]
This will be a somewhat long response, however, I think it is important to understand the reasoning and the ultimate end result.
All limited partnerships are formed under the applicable state statutes. States will follow either the Uniform Limited Partnership Act (ULPA) or the Revised Uniform Limited Partnership Act (RULPA).
Regardless of which Act the state follows, all limited partnerships MUST have at least one general partner that bears personal liability for partnership obligations.
So in your case, you set up an LLC owned by you, which by default is a disregarded entity under the check-the-box regulations.
Any entity who is required to file an information return with the IRS should be obtaining a form W-9 from all taxpayers. In this case, the partnership would be requesting these from the partners.
For the GP, the W-9 instructions are not the model of clarity, but in the end, the IRS indicates it "encourages" the use of a SSN when the entity is disregarded and owned by an individual.
Having said that, it is really a moot issue who you use for the GP in your case. This is because whether you reflect the single member LLC and its EIN or you individually and your SSN, at the end of the day:
If you are the "tax matters person" then you would not qualify for limited partner treatment regardless of how the partnership agreement is written.
First, the partnership would need to be a Limited Partnership (LP) under state law. Only a Limited Partnership can have Limited Partners. The difference comes down to passive income (no self-employment tax) vs. ordinary income (earned income, self-employment tax).
Even if the business is registered and files as a Limited Partnership, a partner listed as a Limited Partner in the paperwork might still be treated as a general partner for self-employment tax purposes. With the proposed regulations 1.1402(a)-2 being on hold indefinitely, the IRS determines Limited Partner status based on case law in your particular state. If someone can sign contracts, including signing off on the tax return, then they would have involvement in management of the business. It would be difficult to support a position that your role is that of a Limited Partner.
There are ways to have a Limited Partner that can get paid for services either to the partnership or on behalf of the partnership. These services cannot be This needs to be laid out in the partnership agreement and make the statement that it is a guaranteed payment without regard to income and that the guaranteed payment is in exchange for the partner's services. In that case, the guaranteed payments would be subject to self-employment tax but the remaining income(loss) would be passive.
If this is still an issue, there have been several recent court cases. Have your CPA, or other qualified tax professional, look into these recent cases.
- Soroban Capital Partners v. Commissioner, 161 TC No.12
- Renkemeyer v. Commissioner (136 T.C. 137)
https://www.thetaxadviser.com/issues/2024/mar/sec-1402a13-and-limited-partnerships.html
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