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Passive or Active, Limited Partner or General Partner

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    Passive or Active, Limited Partner or General Partner

    I have an ongoing issue with a client that I would appreciate some input on. Company is a medical practice-LLC taxed as a partnership. Four of the owners are LP's and the fifth (Owner #5) is an individual. According to the Operating agreement, The management and control of the Company is vested in the Board of Managers and 'Each Manager must be an individual Member of the Company or duly appointed by a related member entity'.

    The Owner #5 insists they perform limited services for the company and should be considered a passive individual. I'm not sure I have a problem with that as long as I get something in writing.

    The bigger issue appears to be that Owner #5 wants to be identified as a 'Limited partner or other LLC member' on the K-1 rather than a 'General Partner'. The entity is an LLC not an LP and there is no mention of Limited Partners in the Operating agreement. All owners have been identified as 'General Partners' for at least the last 4 years. Two of those four years were done by preparers other than myself.

    Of course this is about SE tax. In 2018, the other four individual's appointed an LP as their manager. Line 14 of the K-1 still reports SE earnings but presumably as this passes through the LP it is not taxable as SE earnings when it gets to the individual. (I don't do the individual returns.) The Owner #5's advisor feels 'it's not fair' that the other owners are not subject to SE tax and wants the K-1 to show as "Limited Partner or Other LLC Member'. (I guess it is too difficult for Owner #5 to appoint an LP as his manager...)

    Any input is appreciated. I can't find any description on what is considered an 'other LLC member' and everything I read says a 'service partner' in service partnerships cannot claim limited partner status regardless of their level of participation.

    I also need an authoritative answer on this, does anyone know if the AICPA, NATP or the state CPA society will answer a question like this?

    NATP, and ask for cites.


      See Castigolia TC Memo 2017-62, CCA 201436049.

      If an LLC member does not participate in the management of the LLC or have any rights to manage the LLC then they could be a LP for SE tax purposes and listed as other LLC member on the K1. If the LLC is a member managed LLC then none of the members can be LPs for SE tax purpose because they all have the right to manage the LLC. If it is a manager managed LLC then only those members who are managers would be subject to SE tax.