I formed an LLC with a partner, are we Limited or General Partners?

April 10, 2013 12:40 PM

I am trying to fill out our first 1065 on Turbotax. We formed as an LLC with the State. The IRS doesn't have a designation for LLC, and considers us a Partnership. Turbotax is asking for each member of the LLC whether we are Limited Partners or General Partners. On the operation agreement, we are member, and actively run the business together. We did not specify a member-manager. On Turbotax, it is asking whether we are General or Limited partners and I am wondering which one I should select.

I asked an accountant at H&R Block this question, and they said we are both Limited Partners. However, after asking this question elsewhere on the internet, I've been told we're both General Partners.

I did do some research on Google, but it says federal laws are ambiguous when it comes to this issue, so I am a little confused. I did find a good article at the following link which talks about various court cases on this issue, however... I still can't seem to figure out whether my partner and I are Limited or General:

http://www.aicpa.org/publications/taxadviser/2012/june/pages/clinic-story-04.aspx



Thank you all for your help!

posted by Roki to Work & Money (5 answers total)

Well, according to the IRS:

For certain purposes, members of an LLC are treated as limited partners in a limited partnership. For example, LLC members are treated as limited partners for purposes of material participation under the passive activity limitation rules (see Temporary Regulation section 1.469-5T(e)). See the Instructions for Form 1065 for reporting rules that apply specifically to LLCs.

Member manager. Only a member manager of an LLC can sign the partnership tax return. And only a member manager can represent the LLC as the tax matters partner under the consolidated audit proceedings in sections 6221 through 6234. A member manager is any owner of an interest in the LLC who, alone or together with others, has the continuing authority to make the management decisions necessary to conduct the business for which the LLC was formed. If there are no elected or designated member managers, each owner is treated as a member manager.

So it sure sounds like you are both member managers to me.
posted by misha at 1:12 PM on April 10, 2013

Oh, link to the IRS guide on LLC partnerships (publication 3402).
posted by misha at 1:13 PM on April 10, 2013

I'm not your lawyer, and this is not legal advice. To ensure compliance with requirements imposed by U.S. tax authorities, I inform you that any U.S. tax advice contained in this communication is not intended or written to be used, and cannot be used, for the purpose of (i) avoiding United States federal, state or local tax penalties, or (ii) promoting, marketing or recommending to another party any matters addressed herein.

While you haven't really given us enough info to answer the question, in general, members of an LLC that is treated as a partnership for US tax purposes are more like limited partners than general partners, as members of an LLC do not have unlimited liability with respect to the debts of the LLC. For this reason, the likely correct answer for you here is Limited Partner.
posted by dbolll at 2:12 PM on April 10, 2013

IANYL. But, entity stuff like this is my day job, so this may be useful from experience. I would generally consider the Manager to be equivalent to a General Partner (GP) - the person ultimately responsible for the entity. No entity can exist without one of these. The regular members, who are not Managers, will generally be limited partners (LPs), I'd think, unless they're involved in signing contracts or "actively engaged in managing" the business, in which case, it gets murky. The whole idea of a member or an LP is that they're not really doing much with the entity - they're getting income, maybe, from their investment, but not doing much for the business. GP type responsiblity rests with the folks signing documents and doing business in the name of the company. It sure sounds to me like you're both GP status, and, if I were in your shoes, that is how I would answer that question, based on the facts reported to me.
posted by mccn at 2:14 PM on April 10, 2013

Thanks everyone for your answers. It does indeed seem that we are both member-managers, and we would be considered General Partners. A follow up question I have is that according to the IRS, it says "A general partner is a partner who is personally liable for partnership debts."

So if LLC's reduce liability for individuals, then doesn't this designation of a General Partner defeat the purpose of limited liability? Or, is this only for IRS purposes, and to the State we have limited liability?
posted by Roki at 2:52 PM on April 11, 2013