Entities That Can Use. General partnerships, limited partnerships, and limited liability companies (two or more owners) may select this type.

Main Characteristics. The central characteristics of K taxation are that (1) there is no entity level tax, and (2) there are no significant restrictions on who may be owners. All of the earnings of the entity are taxed to the owners each year, when made, so there is little tax-deferred ability to accumulate earnings for acquisitions and the like.

K taxation provides deductible fringe benefits, such as health, life insurance and such. In a general partnership, all income received is subject to self-employment tax; in a limited partnership, no income received id subject to self-employment tax for true limited partners. In the limited liability context, K taxation provides for a very unclear mechanism for dividing entity earnings between salary income for work done and dividend income for investment return; most tax professionals appear to use the work=salary, investment=dividend approach.

Contributing property to, and taking property out of, a Sub-K taxation entity is generally not treated as a taxable event.

Uses. Sub-K taxation is used by those who want the maximum flexibility, by those who plan to contribute depreciating or appreciating property, and by those who do not mind the rather complicated and arcane rules it uses.  

This memorandum contains general information and while the information presented is accurate as of the date of its publication, it cannot be relied upon as legal advice, as that can only be obtained through personal consultation with an attorney with whom you share your specific facts.

 Copyright © 2005 by Sterling A. Minor. All Rights Reserved.

Last Updated: May 17, 2005