Death of the Partnership?
FMarino123
with a startup, I began wondering if there is much of a
reason to choose the traditional partnership form of
structure anymore. With the modifications to S corp rules
and the advent of LLC's and LLP's it seems unnecessary and
fraught with greater risk. The only thing that came to mind
was accounting for capital -in the S corp would you have to
continually update the relative share positions for
distributions etc? I was wondering what some of you who deal
with this more frequently think?
scratching my head
Frank Marino
internat...@my-dejanews.com
From a tax standpoint, you can do anything with an LLC that you
can do with a partnership. The traditional general partnership
remains the most flexible vehicle available from an accounting,
tax and legal standpoint, but is disfavored because it does not
provide the members with limited liability. Most limited
partnership statutes still require at least one general partner.
Ironically, we may see in the near future that there are very few
"partnerships" subject to the partnership tax rules, with the
area dominated by LLCs at one end of the spectrum and contractual
joint ventures, which are also partnerships for tax purposes, at
the other.
Gene Prescott
> After recently reviewing entity choices to help some friends
> with a startup, I began wondering if there is much of a
> reason to choose the traditional partnership form of
> structure anymore. With the modifications to S corp rules
> and the advent of LLC's and LLP's it seems unnecessary and
> fraught with greater risk. The only thing that came to mind
> was accounting for capital -in the S corp would you have to
> continually update the relative share positions for
> distributions etc? I was wondering what some of you who deal
> with this more frequently think?
Most of our recent startups have formed LLCs, electing to be
taxed as a partnership. Most recent new partnerships have
occurred where they "formed" without much planning :-) Haven't
had many new S or C Corps since LLCs, although being a LLC is
not necessarily the best entity for all situations.
Edward Zollars
> I was wondering what some of you who deal
> with this more frequently think?
We'll still see regular partnerships in those cases where no
formal document is drawn up (a partnership by accident
perhaps we should call it <grin>) and, perhaps, might see it
in some cases where the only liability to a single creditor,
and that creditor is going to demand personal guarantees if
an LLC or LLP is used (so little point of going to the
expense of forming it).
Arguably, what should be gone is the limited partnership
itself in many cases, but we are likely to see it hang
around because there's a lot of case law on it (the official
explanation attorneys like to use <grin>) and because
attorneys haven't gotten around to writing up standard LLC
forms to use in LP style situations (the reason many of us
suspect is the real one <grin>).
Ed Zollars, CPA (AZ)
ezo...@primenet.com
http://www.getnet.com/~hmtzcpas
Drew Edmundson
> After recently reviewing entity choices to help some friends
> with a startup, I began wondering if there is much of a
> reason to choose the traditional partnership form of
> structure anymore. With the modifications to S corp rules
> and the advent of LLC's and LLP's it seems unnecessary and
> fraught with greater risk. The only thing that came to mind
> was accounting for capital -in the S corp would you have to
> continually update the relative share positions for
> distributions etc? I was wondering what some of you who deal
> with this more frequently think?
>
> scratching my head
The cost of forming a general partnership and the annual
licensing fees, etc are usually lower with a partnership than
with an LLC or LLP (depending on the state in question).
Sometimes the additional protection from an LLC or LLP isn't
worth the cost.
For example take two CPAs who are subject to professional
liability regardless of form of business. Assume they work in
the same office on the same clients and can't argue lack of
knowledge so the LLP form does them no good regarding
professional liability. In this case forming an LLP or LLC will
only reduce liability for personal injury, etc. Which may (and
should) be adequately covered by insurance.
On the downside all members of an LLC are not assumed to be
personally liable for basis, at risk, etc purposes as are
general partners. Of course a general partner can be determined
to not be at risk, etc but that is the exception not the rule.
An LLC member on the other hand should be assumed to not be
liable on any LLC debt or liability unless he/she specifically
guarantees it. (ignoring the qualified nonrecourse debt rules).
Therefore LLC members may find that they are limited in claiming
losses by the basis or at risk rules while if the entity was a
general partnership the members would not be so limited.
You can get around this problem by having the members guarantee
the debt but that kinda (grin) defeats the limited liability the
LLC is supposed to provide. All of this is manageable but it has
to be managed or the members/partners may be very unhappy
taxpayers.
Drew Edmundson, CPA (NC)
to reply remove NOSPAM
Michael T. Wing, CPA
> Therefore LLC members may find that they are limited in claiming
> losses by the basis or at risk rules while if the entity was a
> general partnership the members would not be so limited.
Along these same lines, I heard it said that the "members"
of an LLC owning rental real estate are *not* allowed to
claim the up to $25,000 loss under the "active participant"
rules because, as LLC members, they are deemed to be
"limited" partners (and, therefore, can't be "active"
participants). I'm not sure whether this interpretation is
correct, but it is certainly something to think about...
MTW
-Michael T. Wing, CPA
mailto:mike...@compuserve.com
http://ourworld.compuserve.com/homepages/mikewing/
Robert J. Romano
> itself in many cases, but we are likely to see it hang
> around because there's a lot of case law on it (the official
> explanation attorneys like to use <grin>) and because
> attorneys haven't gotten around to writing up standard LLC
> forms to use in LP style situations (the reason many of us
> suspect is the real one <grin>).
Also, limited partnerships are not charged a state annual
fee (at least in Massachusetts). The state annual fee in
Massachusetts for an LLP or LLC is $500.
--
Robert J. Romano, CPA
Arlington, Massachusetts
(781) 648-4966
http://home.sprynet.com/sprynet/rjromano
Bob Kamman
I would not advise anyone to rule them out automatically.
When the issue is more "protection of partners from each
other," rather than "protection of partners from the rest of
the world," I think a general partnership may be worth
considering. There's a lot of existing statutory and case
law that takes the place of writing LLC documents (which
lawyers are happy to do, when clients are happy to pay them
for it).
I agree with Drew Edmundson's observation that "LLC members
may find that they are limited in claiming losses by the
basis or at risk rules while if the entity was a general
partnership the members would not be so limited." I turned
down a prospective client recently who was involved in some
speculative oil venture where some arcane provision of the
Code prohibited limitation of risk. The promoters had put
it into an LLC. Maybe you can do that, but I wasn't really
interested in finding out the hard way.
Bruce Steiner
> After recently reviewing entity choices to help some friends
> with a startup, I began wondering if there is much of a
> reason to choose the traditional partnership form of
> structure anymore. With the modifications to S corp rules
> and the advent of LLC's and LLP's it seems unnecessary and
> fraught with greater risk. The only thing that came to mind
> was accounting for capital -in the S corp would you have to
> continually update the relative share positions for
> distributions etc? I was wondering what some of you who deal
> with this more frequently think?
As is so often the case, "it depends."
An S corporation offers simplicity (it is relatively simple
to create a corporation) and greater certainty of result
(the corporate law is better developed than the partnership
or LLC law).
A partnership (including an LLC taxable as a partnership)
offers several tax advantages compared to an S corporation.
A partnership allows Section 754 elections. Some
corporations cannot qualify for Subchapter S (more than 75
shareholders, nonresident alien shareholders).
Both S corporations and LLCs offer limited liability (as
would a limited partnership with a corporate general
partner).
Some people believe that a partnership may provide a greater
valuation discount than an LLC.
While not raised in your post, there may also be times when
a C corporation is the preferred form.
So, "it depends."
Bruce Steiner, attorney
NYC and Hackensack, NJ
also admitted in FL