Here's a doozy

[DaveinTexas]

A new client comes in and tells us he formed a limited partnership and a LLC---Great!

He is the limited partner---99% partner, okay.

His LLC, disregarded as a separate entity, aka sole proprietorship, aka himself again, is the general partner.

Am I missing something here? Does this constitute a partnership? Can you be your own partner? Why is the sky blue?

Seriously. The LLC is a disregarded entity, meaning not a entity separate from its owner, which also means that this LLC is basically a single owned sole proprietorship owned by the same taxpayer that is also a limited partner in this partnership.

I can't find anything specific on this issue. Can anyone shed some light on the ramifications of this?

TIA

[jainen]

start with what the taxpayer is trying to do

>>shed some light on the ramifications of this?<<

Let's start with what the taxpayer is trying to do. Tell us the nature of the business and his participation in the two roles he has taken on. Does he want to isolate his actions behind the limited liability shield, while keeping the money in a different box? Was this his own original idea, or did he have some professional advice (and is he following it correctly), or is it some scheme he read about someplace that he really doesn't understand?

[OldJack]

He is trying to define his interest in the business as a limited partner with 99% of the income not subject to self-employment tax. There is no partnership as he owns 100% of the business, but he may have a good argument about not being subject to the SE tax. Who knows for sure?

[gkaiseril]

Here's doozy - Need to Plan Ahead

Since your client has clearly not made a decision and the clients tax return is due in less than 75 days your client can no long elect the tax treatment for the 2006 tax year. Under the rules as posted by the IRS, it appears your client has made the decision to be a sole proprietor.

<a href="http://www.irs.gov/businesses/small/article/0,,id=137009,00.html">IRS Offers Information About LLCs</a>

Here is real opportunity to show your client why he/she should plan ahead.

You can explain why the election should be made in a timely manner and how the taxpayer can control the amount of wages paid to himseld/herself can affect the amount of taxes paid. You should also explain the additonal taxes, unemployment tax, that will need to be paid. You should alos explain that your cient may not be be able to collect unemployment benefits since he/she is the owner/officer of the entity paying the taxes.

[Davc]

I believe disregarded means disregarded. As to the legality of the limited partnership, I have my doubts, but state law will determine that.

[DaveinTexas]

He did have professional help

or I should say, "his buddy helped him out with this". His original goal was to separate personal liability which is done by becoming a limited partner. I am supposing that his friend's goal for him was to shield all income from SE tax, which I don't think is possible because I don't think that this partnership exists. There are not two separate entities or two separate people involved in this partnership.

I think that neither goal has been met.

What do you think?

[gkaiseril]

I think your client got what he paid for and his buddy should do the taxes with a guarantee.