soleprop partner

Sole Proprietor: A Partnership

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Sandy Botkin
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Tax Planning Opportunity

Form a limited partnership with your spouse instead of being a sole proprietor:

If you are a sole proprietor, you not only pay income tax on your earnings but also pay FICA taxes on all earnings up to the Social Security limit $128,700 plus a Medicare Surcharge of 2.9% on earnings over $128,700. Wouldn’t it be great if you could avoid some of the FICA taxes and Medicare taxes? Well, you can with a properly structured limited partnership between you and your spouse or significant other.

Here is why this is beneficial: If your spouse is a limited partner, their share of the income is excluded from FICA and Medicare taxes. Even better, both of you still qualify for the 20% pass through the deduction that came about as a result of the new tax law.

Here is how it works: You already either operate as a sole proprietorship or want to start a new business. You and your spouse or significant other, form either a general partnership or a limited liability company to manage the business. You and your spouse provide cash or property for your respective business interests and VERY IMPORTANTLY, your spouse does NOT participate in any way in the business;. He or she is merely an investor.

Key is the fact that your spouse or significant other provides no services to the partnership, you also comply with the limited partnership statutes of your state and that both you and your spouse ( or significant other) sign a document delegating all management authority of the LLC or partnership to you!!

NOTE: The limited partner cannot…

  • provide informal marketing advice,
  • enter into contracts on behalf of the business,
  • be allowed to use their credit card or credit rating for the business,
  • have any personal liability for debts of the business
  • in any way participate in the partnership’s business.

Sandy’s elaboration: In some ways, this is better than being an S corporation. For example, S corporations are required to pay reasonable salaries in order to get the rest of the distribution treated as a dividend which is exempt from FICA taxes. A limited partnership doesn’t have to pay reasonable salaries to anyone. Also, with an S corporation, all distributions must be paid pro rate based on the ownership interests. This is NOT true for limited partnerships.

Finally, you can always switch to an S corporation or even a regularly corporation if this becomes a better tax strategy for you in the future.

Definitely, see a good tax professional about this and feel free to share this post with your friends.


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