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I have an LLP (limited liability partnership) with an

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operating agreement that indicates it's...
I have an LLP (limited liability partnership) with an operating agreement that indicates it's organized as a general partnership. I am the designated 'tax matters partner'. The *other* partner is responsible for most of the day to day operations, though we both have authority over them. I contribute less than ten hours/month of my time. I am thinking that there is a partner status whereby a partner who isn't responsible for day to day operations receives income as dividends, whereas other partners (who *are* responsible for day to day ops) receive *distributions*. Is that right - and how can I achieve that designation before tax time, so that my income is taxed at the dividend rate instead of the form K-1 rate for distributions?
Submitted: 10 months ago.Category: Tax
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10/20/2017
Tax Professional: Tax.appeal.168, Tax Accountant replied 10 months ago
Tax.appeal.168
Tax.appeal.168, Tax Accountant
Category: Tax
Satisfied Customers: 4,795
Experience: 3+ decades of varied tax industry exp. Tax Biz owner
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Hello. Thank you for choosing this Q&A service for assistance. My name is Angela. I will be assisting you.

Q: I am thinking that there is a partner status whereby a partner who isn't responsible for day to day operations receives income as dividends, whereas other partners (who *are* responsible for day to day ops) receive *distributions*. Is that right

A: In brief, the answer is no, your thought pattern is not correct. Partnerships don’t issue stock and don’t pay dividends. Both of these activities are reserved for corporations. However, a partnership can make income that it distributes to its partners. Distributions resemble dividends in several ways: They are normally cash payments and may be issued periodically throughout the year. However, they don’t qualify for special tax rates and are treated as ordinary income. As the business structure is a partnership, it is not possible for your income to be taxed at the dividend rate.

Additional Info:

Partnerships may hold property, including stock investments. Partnerships distribute the dividends received on stock holdings to partners. Qualified dividends stem from U.S. corporations that pay taxes on income and from qualified foreign corporations. These dividends are taxed at long-term capital gains rates. Nonqualified dividends count as ordinary income, taxed at the partners’ marginal rates. Schedule K-1 reports qualified and nonqualified dividends. Partners report these dividends directly on Form 1040.

REFERENCE SOURCE:

http://finance.zacks.com/report-dividends-partnership-stock-tax-return-11104.html

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Customer reply replied 10 months ago
Hi - so what I'm asking about is Limited Partnership whereby there's a "material participation" test to determine if the partner is an investor partner vs. a regular partner. We have a general partnership under the operating agreement and by being registered as an LLP, but we could amend the agreement to make me a limited partner, for instance, and conver the LLP to an LLLP (a limited liability limited partnership), since I work less than 100 hours per year, and my primary role is that of an investor. At least that's what I'm thinking - and thereby, I could take my share of the company earnings as a dividend rather than an distribution-- or at least, I wouldn't pay self-employment tax on the income, because it's not considered 'earned income'. https://www.nolo.com/legal-encyclopedia/limited-partnerships-limited-liability-partnerships-29748.html That's what I'm trying to achieve?
Tax Professional: Tax.appeal.168, Tax Accountant replied 10 months ago

Hello again,

My apologies, I am going to opt, release the question back into the queue and let someone take a stab at this.

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