Ever since my original blog post on single member limited partnerships (found here) I have received numerous comments and questions from attorneys and CPAs inquiring as to the proper tax returns that would need to be prepared, in particular in California, for such an entity.
By way of background, and as I explained in greater detail in my original post, a single member limited partnership (“SMLP”) is merely a limited partnership that has two partners, where one of the partners is a disregarded entity of the other partner. For example, where you have a limited partnership that is owned by John Q. Taxpayer directly and by a single member limited liability company (“SMLLC”) that is wholly owned by John Q. Taxpayer. In this case, because the SMLLC is itself disregarded, for tax purposes John Q. Taxpayer is treated as the sole owner and the SMLP is disregarded for income tax purposes. (See Rev. Rul. 2004-77)
For federal income tax purposes, a disregarded entity would not need to file a federal income tax return (as the disregarded entity’s income is typically reported to the individual owner on a Schedule C as a sole proprietorship). Generally speaking, California conforms to the federal “check the box” regulations (See SB 1234; Stats. 1997, Ch. 608.) However, California law still requires some filings by California LLCs that are treated as disregarded entities.
While CA does require single member LLC’s to file certain returns, there appears to be no mandate that a SMLP file a CA income return. Thus, at least with respect to the SMLP, it appears that no CA income return is required at that level. However, because one of the partners is a SMLLC, then all the California disregarded entity LLC filing rules would apply to that SMLLC.
In particular, per the Form 568 instructions, the SMLLC would have to file Form 568, Side 1, Side 2, Side 3, Side 7 (Schedule IW), and pay the annual tax ($800) and pay the LLC gross receipts fee (depending on the level of the LLC’s gross receipts). Presumably the SMLLC’s gross receipts for purposes of the fee would be limited to its percentage interest in the SMLP (as if a Schedule K-1 had been prepared).
In addition, the SMLLC may also have to fill-in Schedule B and Schedule K in the Form 568 if certain income and distributive income/payments threshold amounts are met. (See pg. 11 on Form 568 Booklet.)
Finally, all SMLLCs must complete Schedule EO, Pass-Through Entity Ownership (568), to report any ownership interest in other partnerships or limited liability companies regardless of whether these entities are required to file a tax return in California, or are subject to California annual tax or LLC fee. Thus, the SMLLC would have to report its ownership interest in the SMLP on the Schedule EO.
Please note, however, that at this point, the Franchise Tax Board has not released any clear guidance on this issue and so the above analysis and recommendations are subject to change.