This article discusses the partner-as-manager position, with details on duties, taxes, and liability.
The Managing Partner Explained
A partnership is a business that has several owners who are usually professionals in the same trade or business. Like any other type of business, a partnership must have someone to manage the day-to-day operations, making decisions for the business. The partnership may decide to management the partnership as a group, but it’s difficult to get consensus if the group is large, and management duties take away from primary duties of partners to get clients and provide services. In this case, the partnership may of select one partner as managing partner. This decision is set in the partnership agreement, which gives the managing partner control of business operations and the ability to enter into contracts on behalf of the partnership. The managing partner wears two hats: working as a partner in their professional capacity, and as the general manager. They report to an executive committee of the partnership or to the partners as a whole, similar to a board of directors for a corporation.
Liability of a Managing Partner
Partners in a general partnership are liable for the debts of the partnership and for the actions of themselves and other partners. The exception is a limited partnership or limited liability partnership that is set up specifically to limit partner liability. In addition to this general liability, the managing partner has additional liability as an agent for the business, in signing contracts, loans, and other legal documents on behalf of the partnership. The partnership may choose to indemnify the partner, holding them harmless for their actions as managing partner.
Duties of a Managing Partner
Managing partners have duties in all areas of the partnership operations. Some of the major areas of responsibility for a managing partner include:
Strategic planning and policies: Work with the Executive Committee to set strategies for long-term goals, policies, and procedures for the partnership, and to implement these decisions. Communication: Responsible for communications within the business, to employees and other partnerships, and outside the business, including the press. Financial and tax management: Overall responsibility for financial affairs of the partnership, including accounting functions, budget, billing, and financial statements and reports. Responsible for partnership taxes and calculation of annual distributions to partners. Employee management: Responsible for hiring, paying, evaluating, and managing employees, following executive committee guidelines and federal and state laws and regulations.Partner relations: Responsible for the new partner intake process, determining partner payments and making agreements with partners. Office management: Responsible for the physical office, dealing with vendors and utilities, and maintenance contractors.
Managing Partner Pay and Taxes
Managing partners are paid and pay taxes in a different way from other partners, and they have increased liability for their actions.
How a Managing Partner Is Paid
A managing partner is paid in two ways:
As a partner, they receive a distributive share of the partnership income every year. This share is paid based on the person’s investment in the business and the share of partnership determined by the partnership agreement. As a manager, they receive a special distribution, called a guaranteed payment, for management duties for the partnership. In this position, the managing partner is not considered a member of the partnership but is performing services to the partnership
How a Managing Partner Pays Income Tax
The managing partner pays income tax on both their distributive share and guaranteed payments for performing services for the partnership. The guaranteed payments are not based on the partnership’s income. Partners (including the managing partner) are also considered self-employed so they must pay self-employment taxes (Social Security/Medicare tax) on their share of the partnership’s income and on their guaranteed payments.
Managing Member in a Limited Liability Company
A limited liability company (LLC) with several owners (called “members”) is taxed like a partnership and it operates in a similar way to partnerships, with members instead of partners and an operating agreement instead of a partnership agreement. A CEO reports to the corporation’s board of directors, while a managing partner reports to the partners as a whole body.
