Can a Limited Partnership Have a Pension Plan?
Business Models & Organizational Structure
By Tim Plaehn
Types of Retirement Plans Offered by Businesses
Differences in a Partnership and Corporation for Tax Treatment
Can an S-Corp Owner Have Unreimbursed Employee Expenses?
What Is a Partnership Entity on a W-9?
What Are the Differences in Income Statements for Proprietorship and a Partnership?
A small business can be organized as a sole proprietorship, partnership, corporation or LLC. The tax and employee benefit rules allow a small business of any structure to set up a pension plan for employees. For a company organized as a partnership, the tax rules do make a difference between types of partners, and limited partners may not be allowed to participate in a retirement plan.
Employer-Sponsored for Employees
The types of pension plans that can be used by a small business include 401(k), SEP-IRA, SIMPLE IRA and defined-benefit plans. Most small businesses go with the defined contribution plans such as a 401(k) or IRA based plan rather than the traditional but complicated and expensive defined-benefit plan. A pension plan set up by a business is for the benefit of employees, which can include the owners or partners in the business.
Partners As Owners And Employees
When a business is organized as a partnership, a partner typically is viewed in two ways by the Internal Revenue Service. As an owner, a partner's compensation is her share of the net profits of the business. The partner does not earn wages nor receive a W-2 at the end of the year. Instead, the partner receives a report of her proportionate share of business expenses and earnings to claim on her personal tax return. However, when it comes to benefits, a managing partner participates like an employee and is covered under the company's health plan and is a participant in the partnership-sponsored retirement savings plan.
Limited Partner Limits
Partnerships may have several different types of partners and compensate partners differently. For a partner who works to run and manage a business, his earnings from the business are viewed as earned income for tax purposes. With the earned income, the partner also fills the employee requirements for benefits. A limited partner, because he does not work or provide service toward the daily operation of the business, is more of an investor, and the money paid by a business to a limited partner would be classified as investment income. Limited partners would not participate in the company pension plan.
Real World Example
A visible example of limited partnerships and pension plans are the publicly traded partnerships in which investors can buy into through shares -- technically called units -- trading on the stock exchanges. In this case, there is a company with employees that participate in whatever pension plan the company offers. Investors own limited partnership units in their brokerage accounts and are not part of any employee benefits.
Internal Revenue Service: Retirement Plan FAQs Regarding Contributions - What is a Partner's "Compensation" for Retirement Plan Purposes?
Internal Revenue Service: Publication 560: Definitions You Need to Know
U.S Department of Labor: Choosing a Retirement Solution for Your Small Business
Tim Plaehn has been writing financial, investment and trading articles and blogs since 2007. His work has appeared online at Seeking Alpha, Marketwatch.com and various other websites. Plaehn has a bachelor's degree in mathematics from the U.S. Air Force Academy.
Advantages and Disadvantages to Revenue Sharing
Can a Partner in a Partnership Also Be an Employee?
Why Do Employers Contribute to an Employee's Retirement Plan?
Tax Deductions for Employee Medical Plans
Tax Basis for Partnership Interest
Simplified Employee Pension (SEP) Tax Rules
Sub-Chapter S Corporation: The Retirement Plan & Tax Deferred Benefits
Partnership Tax Return Requirements
Non-Qualified Deferred Compensation Agreements
1 Advantages and Disadvantages to Revenue Sharing
2 Can a Partner in a Partnership Also Be an Employee?
3 Why Do Employers Contribute to an Employee's Retirement Plan?
4 Tax Deductions for Employee Medical Plans