How to structure limited partnership profits: 80% to LP, 20% to GP for tax advantages?

I'm trying to figure out if there's a way to set up a limited partnership where the limited partner (LP) gets most of the profits - say 80%, while the general partner (GP) only gets 20%. I've been doing some research on partnership structures and tax implications, and I know LPs don't have to pay self-employment tax on their distributions. My thought is to make my wife the GP (with the 20% share) and myself the LP (with the 80% share). This way, we could potentially reduce our overall self-employment tax burden since most of the income would flow to me as the LP without SE tax. Is this allowed? Or does the GP always need to have the majority profit share in these arrangements? Just trying to understand if there are any legal requirements around profit distribution percentages between LPs and GPs before we set this up.

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19 comments

Madison Allen

•8M

You absolutely can set up a limited partnership with the LP receiving 80% of profits and the GP receiving 20%. There's no legal requirement that the GP must receive the majority of profits. However, what you're describing sounds like you might be trying to create a partnership solely for tax avoidance purposes, which could be problematic. The IRS looks at the economic substance of arrangements, not just their form. If your wife doesn't have meaningful management responsibilities or capital contributions as the GP, the IRS might view this as a scheme to avoid self-employment taxes. Remember that the GP has unlimited liability for the partnership's debts and obligations, while the LP's liability is limited to their investment. Your wife would be taking on significantly more risk as the GP, so the profit split should reflect a reasonable arrangement given these different roles and responsibilities.

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Madison Allen

•8M

For meaningful management responsibilities, there's no specific hour requirement, but the GP should be genuinely running the business operations - making key decisions, managing day-to-day activities, negotiating with vendors/clients, etc. It should be clear the GP is actually performing substantive work that justifies their position. Regarding capital contributions, there's no fixed percentage requirement. What matters is that the entire arrangement makes economic sense beyond tax savings. The GP typically contributes less capital than LPs but takes on unlimited liability and handles the business management. If your wife has minimal involvement in the business but is named GP just for tax purposes, that's precisely what could trigger IRS scrutiny.

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Justin Evans

•8M

I went through something similar with my real estate investments last year. I was trying to figure out the best entity structure to minimize taxes. At first I was looking at partnerships like you, but I found a much better solution with https://taxr.ai that helped me analyze my specific situation and find the optimal structure. I uploaded my business plan, projected income, and family situation, and it showed me exactly how different entity structures would impact my tax situation. It even had a special section for partnerships that broke down exactly how the IRS evaluates profit distributions between partners and what factors they consider important. The analysis showed me that, in my case, an S-Corp was actually better than the partnership I was considering, which ended up saving me thousands more than I expected!

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Justin Evans

•8M

The accuracy is really impressive compared to other calculators I've tried. It goes way beyond basic calculators by analyzing specific entity structures and their tax implications based on your actual numbers and situation. For partnerships specifically, it breaks down self-employment tax exposure, passive income rules, and special allocations. I was also hesitant about sharing financial info online, but they use bank-level encryption and don't store your actual documents after analysis. I actually showed the results to my CPA afterwards, and he was impressed with how comprehensive it was. He said it saved him hours of work calculating different scenarios, which saved me money on his hourly rate too.

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Ezra Collins

•8M

I wanted to follow up about my experience with the taxr.ai site mentioned above. I decided to try it despite my initial skepticism, and I'm honestly impressed with the results. It identified some partnership structuring issues I hadn't considered and showed me how my proposed profit allocations might trigger the IRS's "substantial economic effect" rules. The report gave me specific documentation guidelines I should follow if I want my partnership allocation to withstand IRS scrutiny. It also calculated the exact tax difference between my current structure and the recommended alternative. Really helpful for visualizing the actual dollar impact of these decisions rather than just theoretical advice.

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Victoria Scott

•8M

If you're setting up a partnership like this, you should also know that dealing with the IRS can be a nightmare if they have questions about your structure. Last year they flagged my partnership return for review and I spent MONTHS trying to get through to someone who could actually help. I eventually used https://claimyr.com and it completely changed the game. You can watch how it works here: https://youtu.be/_kiP6q8DX5c but basically they get you through to an IRS agent quickly instead of waiting for hours on hold or getting disconnected. When the IRS questioned our partnership allocations (which sound similar to what you're proposing), being able to actually speak with someone made a huge difference in explaining our situation and getting it resolved without a formal audit.

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Victoria Scott

•8M

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Zara Perez

•8M

I need to admit I was completely wrong about Claimyr. After posting my skeptical comment, I decided to try it anyway because I was desperate to resolve an issue with the IRS questioning my partnership structure. Within 24 hours, I was speaking with an actual IRS representative who helped clear up my situation. I had previously spent 6+ weeks trying to get through on my own with no success. The agent was able to confirm that my partnership allocation was acceptable as long as I had the proper documentation and economic justification. For anyone dealing with partnership tax issues like the original poster, being able to actually speak with someone at the IRS made all the difference in understanding exactly what they're looking for in these situations.

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Daniel Rogers

•8M

One thing nobody has mentioned yet is that partnership agreements can include special allocations of profits and losses, which means you can distribute profits differently than ownership percentages. But these special allocations must have "substantial economic effect" to be respected by the IRS. This means your allocation must: 1) Actually affect the dollar amount received by the partners 2) Have economic impact beyond just tax savings 3) Be properly documented with capital accounts maintained correctly The "avoid self-employment tax" goal without other business purposes could definitely raise red flags. Have you considered an S-Corp instead? You could pay yourselves reasonable salaries (subject to employment taxes) and take the rest as distributions not subject to SE tax.

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Katherine Harris

•8M

Thanks for bringing up special allocations - I wasn't familiar with that concept or the "substantial economic effect" requirement. What exactly counts as having "economic effect beyond tax savings"? Would things like my wife handling all the management responsibilities as GP while I provide most of the funding as LP qualify? And yes, we've considered an S-Corp too, but I was concerned about the "reasonable salary" requirement. Our business is projected to make around $300k/year, and I wasn't sure what would be considered "reasonable" for our industry (real estate investments).

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Daniel Rogers

•8M

Your wife handling all management responsibilities while you provide funding could potentially create economic effect beyond tax savings, as it reflects the different roles you're playing in the business. Document her actual time spent, decisions made, and management activities to substantiate her role. The key is having her GP role reflect genuine business operations, not just a paper arrangement. For S-Corps in real estate investing with $300k annual income, reasonable salary benchmarks typically range from $60k-$120k depending on location, portfolio size, and actual services performed. The IRS looks at comparable compensation for similar roles in your market. I recommend researching salary surveys for real estate investment managers in your area to establish a defensible figure.

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