Limited Partnerships = Self Employment Tax Savings?
Advantages:
Limited partnerships are treated as partnerships for federal income tax purposes, with the generally favorable partnership taxation rules mentioned in our previous newsletter.
Limited partners generally are not exposed to liabilities related to the partnership or its operations. So, you generally cannot lose more than what you’ve invested in a limited partnership—unless you guarantee partnership debt.
On the plus side, limited partners have a self-employment tax advantage.
Disadvantages:
So far, so good. But you must also consider the following disadvantages for limited partners:
- Limited partners usually get no basis from partnership liabilities.
- Limited partners can lose their liability protection.
- It would help if you had a general partner.
Since your partnership will have multiple partners, multiple issues can come into play. You’ll need a carefully drafted partnership agreement to handle potential issues, even if you don’t expect them to arise. For instance, you may want to include:
- a partnership interest buy-sell agreement to cover partner exits;
- a non-compete agreement (for obvious reasons);
- an explanation of how tax allocations will be calculated in compliance with IRS regulations;
- an explanation of how distributions will be calculated and when they will be paid (for instance, you may want to call for cash distributions to be made annually in early April to cover partners’ tax liabilities from their shares of partnership income for the previous year);
- guidelines for how the divorce, bankruptcy, or death of a partner will be handled;
And so on.
Key point: No entity (including a limited partnership in which you are a limited member) will protect your assets from exposure to liabilities related to your professional malpractice or tortious acts.
If you would like to discuss partnerships, please Book Your Free Assessment Here.