Non-equity partner

[Earl]

I have a small law firm client that just made a guy a non-equity partner. All I can find is that he is treated as a self employed person (which coincides with what they are telling me that he will take draws).

Is this guy a Key EE?

Is he a 5% owner (of his own Schedule C?) making him a 5% owner and making it an affiliated service group somehow?

Is this guy an HCE? I can't figure how he is an owner but if he is he would be HCE regardless of income, which was not that much last year, and not part of top 20%.

Thanks for any comments.

[rcline46]

The simple response is ask the client. There is such a thing as a profits partner, and 'owning' more than 5% of the profits makes the person an HCE for plan purposes. You really need more information from the client.

[Guest mjb]

I have a small law firm client that just made a guy a non-equity partner. All I can find is that he is treated as a self employed person (which coincides with what they are telling me that he will take draws).

Is this guy a Key EE?

Is he a 5% owner (of his own Schedule C?) making him a 5% owner and making it an affiliated service group somehow?

Is this guy an HCE? I can't figure how he is an owner but if he is he would be HCE regardless of income, which was not that much last year, and not part of top 20%.

Thanks for any comments.

For employment purposes a non equity partner can be an employee if he does not share in the rights of an owner to receive profits from the firm. What he may be a a self employed person employed by the firm who is neither a partner or an employee. Self employed persons who are employed by a partnership are not usually eligible to participate in the firm's plan. You need to cxheck the emplyment agreement and the plan document.

[Earl]

That helps alot. Thanks.

This guy was a W-2 employee and I am quite certain that he is only working for this firm now - still.

So it seem an affiliated service group would be happening and I should get the guy to adopt as a participating employer.

[Bird]

So it seem an affiliated service group would be happening and I should get the guy to adopt as a participating employer.

Whoa. If he's a partner, he's a partner, not an independent contractor. There should be no need for anything special.

[Earl]

So maybe he should be getting a K-1 with guarantee payments only and not a Schedule C (they told me he would be filing a Schedule C)?

That kinda makes sense.

Then he is 0% owner, non-key and NHCE as he is not in top 20% (elected)

[GBurns]

Maybe they are using a different definition of "Partner" ?

A partner in a partnership gets a K-1 not a W-2.

"Draws" could also mean advances. Draws or advances against what ?

[Guest mjb]

Maybe they are using a different definition of "Partner" ?

A partner in a partnership gets a K-1 not a W-2.

"Draws" could also mean advances. Draws or advances against what ?

An independent contractor who performs services for the firm will receive a 1099 but will not b e partner. A non equity partner will receive a W-2.

[Bird]

I've heard people throw around the term "Schedule C" when they really mean that the person will have self-employment income (as in getting a K-1 as a partner). I don't know if that's the case here but there's enough misinformation and inconsistency here to suspect it.

[MARYMM]

Maybe they are using a different definition of "Partner" ?

A partner in a partnership gets a K-1 not a W-2.

"Draws" could also mean advances. Draws or advances against what ?

An independent contractor who performs services for the firm will receive a 1099 but will not b e partner. A non equity partner will receive a W-2.

When I worked for a law firm, they had several non-equity partners. They received K-1's not W2s.

Since they didn't have equity, they were not 5% owners. IIRC, they were not key employees either.

The use of the term "draws" may be a little confusing. Their draw is not taken in anticipation of their actual income tbd at year end. Their income for the year is fixed and known. It is just characterized as a draw because it is not a salary and is not paid thru payroll.

[K2retire]

The main reason the term "draw" is confusing is that different people use it to mean completely different things. One can't assume that this client uses it the same way any other client does.