Partnership Question

[S T]

I have a husband/wife partnership 80/20 - Husband manages and totally operates the day to day business - wife is a 20% partner and has no daily activities or involvement in Business.

On the K-1 input it asks for #I - Type of entity - and under G if she is a General Partner subject to SE Tax or Limited partner not subject to SE Tax.

Since the wife has no involvement in the business, would she still be a General Partner and subject to SE Tax and I would have to show her as an Individual - Active?

Or can I show her as not being subject to SE Tax?



Thanks,

Sandy

[Lion]

Agreement?

Do they have a partnership agreement? If so, does it address this. If she's not active and if she's a minority partner, I'd probably NOT call her a general partner and NOT assign SE income to her. Does she get guaranteed payments or medical insurance?

[S T]

Partnership Agreement

The partnership agreement does not address this. Wife is only a 20% partner, not active, receives no guaranteed payments or medical insurance.
Sandy

[ChEAr$]

The partnership agreement does not address this. Wife is only a 20% partner, not active, receives no guaranteed payments or medical insurance.
Sandy

Thus in the absence of her being designated AS a limited partner in the agreement, by
default, the state under the Uniform Partnership Act regards her as a general partner.

[Lion]

Bum

That's a bummer. Would that be state by state then, since organized with a state? Time to amend the partnership agreement.

[JG EA]

But wouldn't the wife share in ecomonic up and downs of the partnership and be liable for debts of the partnership because of the related thing and so have to be a general partner? Is the money from the partnership coming from joint funds? I don't have an opinion right now, but want to find out. It seems an interesting subject.

Another question - does she do anything at all to contribute to the success of the business like bookkeeping?

[S T]

General Partnership

Unfortunately the wife no longer participates in the partnership - She has ALS (Lou Gehrig's Disease) and is not physically capable. Therefore the question - as she does not materially participate.

Of course - California - funds come and go through a joint personal account, and as of right now she would still be liable for any debts of the partnership.

I am exploring possibilities, but looks like she should be gifting out her 20% interest to her children (one of which works in the business).

Any thoughts or guidance would be much appreciated.

Thanks,

Sandy

[ChEAr$]

technically

That's a bummer. Would that be state by state then, since organized with a state? Time to amend the partnership agreement.

Yes, states might vary but.... See if your state subscribes to and/or has adopted the
Uniform Partnership Act. Most all states have; I don't know of any exceptions.

[JG EA]

TTB:
"General partner. A general partner is a partner who is personally
liable for partnership debts. A general partner is subject to
SE tax on guaranteed payments and on the distributive share of
partnership income.
Limited partner. A limited partner is liable only for the amount
of money or other property that the partner contributed or is required
to contribute to the partnership. A limited partner is subject
to SE tax on guaranteed payments but is not subject to SE tax
on the distributive share of income."

So, my question is still what is her liability?

Also, What box does the partnership check on page 2 Sch B now? Instructions: "A general partnership is composed only of general partners" Ignorance here - can they just change this?

[S T]

Liability

The spouse is responsible for any liabilities and debts of the partnership - so I don't see how she can not be subject to SE uner the General Partnership Rules,as pointed out in this post. And yes the box is checked. I guess then material participation does not matter when looking to the SE Tax.

Thanks for the references JG

Sandy

[Zee]

Here's a link to an article that might help answer your question (see page 2):

http://www.allbusiness.com/human-resources/compensation-payroll-social-security/910385-1.html

[ChEAr$]

Yes

TTB:
"General partner. A general partner is a partner who is personally
liable for partnership debts. A general partner is subject to
SE tax on guaranteed payments and on the distributive share of
partnership income.
Limited partner. A limited partner is liable only for the amount
of money or other property that the partner contributed or is required
to contribute to the partnership. A limited partner is subject
to SE tax on guaranteed payments but is not subject to SE tax
on the distributive share of income."

So, my question is still what is her liability?

Also, What box does the partnership check on page 2 Sch B now? Instructions: "A general partnership is composed only of general partners" Ignorance here - can they just change this?

They can change that by amending the partnership agreement, but such change
may not be retroactive. Legally, that is.

[Bees Knees]

Do not confuse the issue. The issue is whether or not she has limited liability. Not whether or not she participates in the business.

A person can have a Schedule C activity that is passive due to the fact that the owner does not participate but rather hires a manager to run the business. That Schedule C would still produce SE tax for the owner, even though any losses would be subject to the passive loss limitations.

The same is true with partnerships. The Uniform Partnership Act may have some say, but the real issues has to do with limited liability. That is something only State law can address. Absent of some State rule that grants her limited liability status, she is a general partner subject to SE tax. The amount of participation in the business, if any, is irrelevant.

[Zee]

Do not confuse the issue. The issue is whether or not she has limited liability. Not whether or not she participates in the business.

A person can have a Schedule C activity that is passive due to the fact that the owner does not participate but rather hires a manager to run the business. That Schedule C would still produce SE tax for the owner, even though any losses would be subject to the passive loss limitations.

The same is true with partnerships. The Uniform Partnership Act may have some say, but the real issues has to do with limited liability. That is something only State law can address. Absent of some State rule that grants her limited liability status, she is a general partner subject to SE tax. The amount of participation in the business, if any, is irrelevant.

I thought the question whether or not the 20% spouse ownership was required to pay SE tax, and the wife did not participate in the business?

The article I posted indicated the following, and the conclusion seems reasonable to me:

"In the absence of a partnership, the net self-employment income from a spousal sole proprietorship is allocated solely to the spouse who carries on the trade or business. (Revenue Ruling 82-39, 1982-1CB 119, equates the treatment for community property spouses to that of non-community property spouses. See also Jones, 67 TCM 1194-230, p. 3000.) The same rule applies to spouses in community property states, where the income from a business is allocated solely to the spouse exercising substantially all of the management and control even though it may be community income".

As such, the absence of a partnership agreement and non-participation seems to be the issue to me. It seems to me all the income/loss should be allocated to the spouse working the business.

[S T]

Zee

Zee, thanks for your post and questions -

In this case I am filing a form 1065 - not Schedule C - They are in Calif which is a community property state.

Is it possible to allocate "all" to the partner that materially participates and nothing to the 20% partner? Profit/Losses would be 100%, but capital and liabilities would still be 80/20?
I thought that could only be done for a Limited Partnership?

Sandy