Can a partnership use one of the partners as a subcontractor that provides the labor?

Asked over 1 year ago - Santa Ana, CA

This seems to be legal.

Since corporations have companies under them specialize and pay the other companies bills, would this be viable for a partnership.

From a tax perspective can one partner for instance handle all the labor.
The other general partners would not have to go through the hassles of payroll tax, edd, etc.
Let the partnership on the whole be the management.
This would simplify payroll as one partner handles that.
Also in terms of workman's compensation, everything would be handled by the one partner.

Is this illegal?

Attorney answers (4)

  1. Peter Collins Freeman

    Contributor Level 10

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    Answered . There are several issues presented by your question, which will require a more careful analysis and more facts from you to provide a definitive answer.

    However, there is no prohibition for a partnership to hire a partner to provide services for the partnership, i.e. labor, and to handle the payroll tax issues, etc for that labor. It would require an agreement, approved by the partners, and the separation of the partnership from the individual partner's business must be carefully observed.

    The partners can select a managing partner to oversee the partnership's business and activities, which should be set out in the partnership agreement, and any dealings between a partner and the partnership must be fully disclosed and approved by the partners to avoid any later claims by a partner of inappropriate 'insider' dealing or self-dealing.

    If the partnership exercises too much supervision and control, the separation between the partnership and the business of the individual partner may not be accepted by the taxing entities, and the partners would be liable for any tax-related obligations of the individual partner's business operations.

    You should consult a business attorney in your area.

  2. James Carl Eschen III

    Contributor Level 16

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    Answered . From just your header, the answer is yes. You need to make sure that the partner has a contract specifically allowing the partnership to compensate it; otherwise, it will be assumed that the partner is just acting out of its general obligations to the partnership.

    Your explanation of your question only confuses the issue. You have to be much more specific about what you plan.

  3. Michael Ross Lykken

    Contributor Level 11

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    Answered . Your explanation of the question somewhat confuses the question. A partner in a partnership can't receive W-2 wages for work done on behalf of the partnership. Instead, the partner receives self employment income and has to pay self-employment tax, much like a sole proprietor.

    If a partner has a business the partnership can hire that business to provide services to the partnership. It almost sounds like you are envisioning a situation in which the partner has a company that essentially acts like an employment agency. It hires the employees, places those employees with the partnership, but the company pays the employment taxes and other costs of employment. You would want to ensure that the contracts are sufficiently arms-length, and ensure that the partnership is not responsible for any costs of the employment, so you would want to retain an attorney to make sure the required contracts are properly drafted. We actually had a similar situation with an LLC, which worked out well to the satisfaction of all the parties involved.

    All information provided is for general purposes only and does not establish an attorney-client relationship.
  4. Matthew Erik Johnson

    Contributor Level 17

    5

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    Answered . Yes. However, depending on the entity you have and the tax election you took, you may not be able to escape self-employment tax.

    Matthew Johnson phone# 206.747.0313 is licensed in the State of Washington and performs bankruptcy, short sale... more

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