Standard for the Limited Partner Exception, K Alain (5th Cir. Aug. 12, 2026); Soroban (2nd Cir. Sept. 17, 2026); S Corporations May Be More Favorable
“Limited partners” are not subject to the SECA self-employment tax (up to 15.3%). Recent cases in the Fifth Circuit and Second Circuit describe a similar standard for who qualifies as a limited partner for that purpose – someone who is not involved in managing or running the business. K Alain, L.L.L.P v. Commissioner, 2026 WL 2333930 (5th Cir. Aug. 12, 2026); Soroban Capital Partners LP v. Commissioner, 2026 WL 2751819 (2d Cir. Sept. 17, 2026). The limited partner exception described in these decisions is broader than what has been described as a “passive investor” test from the Tax Court, but many business founders who are involved in management would not qualify for the exception. Similar principles apply for LLC members. By contrast, S corporation shareholders must receive reasonable compensation, but their flow-through income from the corporation is not subject to the SECA tax.
