Non-equity partners

[BG5150]

One of the companies I work on has a non-equity partner who made $350,000 on his K-1.

Is he considered a key employee?

I am assuming that the 350k is more than 5% of the profits.

[mbozek]

One of the companies I work on has a non-equity partner who made $350,000 on his K-1.

Is he considered a key employee?

I am assuming that the 350k is more than 5% of the profits.

A 5% ownership interest is not determined by the amount of $ paid to a partner if the $ are not considered profits of the business.

Reg 1.416-1 T-17 states that in a non incorporated business a 5% owner is any employee who owns more than 5% of the capital or profits of the employer. In a corporation a 5% owner is any employee who owns more than 5% of the value of the stock or 5% of the voting power of the stock of the corporation.

Many businesses (e.g. law firms) designate employees as partners to make clients feel that they are getting a higher level of representation than an attorney who is an associate or counsel. However, non equity partners do not receive a share of the firms profits or make a capital contribution- they are paid based on the hours they bill or amount of business generated by their clients and they are not personally liable to creditors of the firm.

You need to ask the client if the non equity partner shares in the profits of the firm or has made a capital contribution.