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What is the advantage/disadvantage of being limited partner…

What is the advantage/disadvantage of...
What is the advantage/disadvantage of being limited partner in a LLC instead of General partner. I know that from the limited partner's distribution there is no 15% self employment tax, yet General partner has to pay self employment tax. If the LLC has 3 partners, and each one take a distribution of 100K, each one of them has to pay 15K self employment tax... If last year the member was marked as General partner, can he be changed to Limited partner this year?My Client has an LLC that has 3 partners. The main guy does it all - buys it, fix it, sells it. the other two simply put in the money and split the profit into 3 equal parts. Should the main guy be the general and the other two limited and/or limited/passive?Please be as detail as you can -- thank you in advance
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Answered in 30 minutes by:
3/23/2018
Lev
Lev, Tax Advisor
Category: Tax
Satisfied Customers: 32,699
Experience: Taxes, Immigration, Labor Relations
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Just a few items I would consider critical.

A limited partner (also referred as a silent partner)
- as the name implied - has limited liability for the business’s debts and liabilities - that it - liability is limited by the contributed capital.
- income and loss will be passive - for instance losses are not deductible agains other active income
- income is not self-employment income - while that may provide saving on self-employment taxes - the partner may not use that income for retirement plan contributions, will not earn social security credits, etc
- if the partnership privides benefits such as health insurance, other fringe benefits primary designed for employees - these are not allowed for limited partners;
- deductions of partner's expenses - for instance - business related miles would not be appropriate for limited partners;
- limited responsibilities in terms of the daily operations of the business, not involved in the daily operations of the business, no participation in management meetings, less than 500 hours involvements.
- a new section 199A 20% deduction will not be allowed to limited partners as there income is considered as investment and not business income.

.

In the partnership - partners are personally liable to the business’s debts whereas partners in the LLC cannot be held personally liable for the financial obligations of the LLC.
However in practice - creditors are suing the LLC and the manager - so the general partner may be potentially held personally liable for his/her actions, while limited partners are still fully protected.
So potential liability may be heavily shifted to the general partner.
It might be OK as long as there is no issues.
But under some circumstances the general partner becomes more vulnerable and because of that it might be fair to have larger compensation.

Lev
Lev, Tax Advisor
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Customer reply replied 1 month ago
Thank you so much Lev
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