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Editorial 11 MIN READ

The general partnership at the start of 2022

No filing fee, no state register, no beneficial-ownership report, and a Social Security wage base that crossed $147,000 on Saturday

The Editors
Staff, Incorporator.org
11 min read Updated
Contents 6 sections
  1. The Corporate Transparency Act, and why most general partnerships are out
  2. The 2022 self-employment math
  3. 1099-NEC at $600, and 1099-K at $600
  4. Build Back Better is dead, and the spring is quiet
  5. What is true about the structure in January 2022
  6. Sources

general partnership in January 2022 is the only common operating vehicle in the United States that is not going to file anything with FinCEN. That is the headline change since our May 2020 field report, and it is the first time in a long while that the absence of a state filing has cashed out as a concrete federal advantage rather than a lurking liability problem.

Everything else on the ledger is continuity. RUPA § 202 still makes a partnership out of conduct, as we covered at formation in January 2017. RUPA § 306 still makes the partners jointly and severally liable for everything the partnership owes. Subchapter K still moves the tax to the partners' returns under the § 199A architecture we walked through in September 2018. What has moved in the twenty months since May is the ceiling on Social Security taxable earnings, a new $600 floor on payment-card reporting, and a roughly $2 trillion bill that looked live in November and does not look live on January 4.

The Corporate Transparency Act, and why most general partnerships are out

The Corporate Transparency Act sits at Division F, Title LXIV of the William M. (Mac) Thornberry National Defense Authorization Act for Fiscal Year 2021, Pub. L. 116-283 (January 1, 2021). Section 6403 is the operative provision; it adds a new 31 U.S.C. § 5336 that will require a "reporting company" to file beneficial-ownership information with the Financial Crimes Enforcement Network. FinCEN's Notice of Proposed Rulemaking on the reporting rule appeared at 86 Fed. Reg. 69920 on December 8, 2021, with a sixty-day comment window that closes February 7. The final rule is not out. The effective date for the filing obligation is a function of when Treasury promulgates the final regulation.

The statutory definition of "reporting company" is the line that matters for a general partnership. 31 U.S.C. § 5336(a)(11)(A), as added by § 6403, defines a reporting company as a corporation, limited liability company, or "other similar entity" that is "created by the filing of a document with a secretary of state or a similar office under the law of a State or Indian Tribe." A RUPA § 202 general partnership is not created by the filing of a document. It is created by two or more persons carrying on a business for profit as co-owners, whether or not the persons intend to form a partnership. That is the plain text of § 202(a), and every state's adoption of RUPA preserves it.

The FinCEN NPRM confirms the reading. At 86 Fed. Reg. 69930 the agency summarizes its view that sole proprietorships and general partnerships, because they are not formed by filing a document with a secretary of state, are not reporting companies under the statute even in the absence of a categorical exemption. A general partnership whose partners also file a fictitious-name certificate at the county level, or a statement of partnership authority under RUPA § 303, is not thereby "created" by that filing; the partnership predates the statement and would exist without it.

The operational translation is narrow but real. A two-person consulting firm organized as a RUPA general partnership has no beneficial-ownership filing coming. Its sister firm organized as an LLC or an LLP will file one, likely starting in 2023 or early 2024 depending on the final rule's effective date. For existing partnerships in a state where LLP conversion runs through the same clerk that registers a corporation, the CTA is the first reason in twenty years to think seriously about leaving the LLP wrapper off a small operating partnership, because the LLP statement is the filing that pulls the entity inside § 5336.

The tradeoff has not changed. Staying a general partnership keeps the CTA off the partners' desk and keeps RUPA § 306 on it. Every partner remains personally exposed, without limit, for the partnership's obligations, and the exhaustion rule in § 307(d) only requires a creditor to try the partnership first before reaching personal assets. For a professional-services shop with no material inventory and no physical plant, that exposure is largely already covered by malpractice insurance. For a partnership that owns anything worth attaching, the answer is usually still an LLP or an LLC, and the CTA filing is a cost of that answer rather than a reason to avoid it.

The 2022 self-employment math

The Social Security Administration announced the 2022 contribution and benefit base at $147,000, effective January 1, up from $142,800 in 2021 and $137,700 in 2020. For a working partner with net earnings from self-employment above the base, the 12.4 percent Old-Age, Survivors, and Disability Insurance portion of self-employment tax caps at $18,228 on the 2022 Schedule SE. The 2.9 percent Medicare portion runs uncapped, with the 0.9 percent additional Medicare tax under IRC § 3101(b)(2) layering on above $200,000 of self-employment income for a single filer and $250,000 for a joint return.

The mechanics sit where Subchapter K put them. A general partner's distributive share of ordinary trade-or-business income is net earnings from self-employment under IRC § 1402(a). A guaranteed payment for services under IRC § 707(c) is also net earnings from self-employment to the partner who receives it. The partnership does not pay employer-share FICA on either; the partner pays the full rate on Schedule SE, net of the 0.9235 multiplier that removes the employer-equivalent portion from the base. Trying to recharacterize a guaranteed payment as a draw against future allocation does not move the dial, because § 1402(a) sweeps in both.

Two 2022-specific adjustments are worth putting on the return workbook now. IRC § 199A keeps its architecture under T.D. 9847, and Rev. Proc. 2021-45 sets the 2022 threshold amount at $170,050 for single filers and $340,100 for joint filers, with phase-in ranges of $220,050 and $440,100 respectively. A consulting, law, health, or financial-services partnership whose partners sit above those ceilings sees the SSTB disallowance bite fully; a partner under the threshold still takes the clean twenty percent on qualified business income regardless of SSTB status. The twenty-four-month gap between the 2020 and 2022 thresholds is about $13,000 on the single side, so partners who were a comfortable distance under the ceiling in 2020 on a nominal-wage view may be closer now on a nominal-earnings view.

The second item is the expiration of the 100 percent bonus depreciation rate. IRC § 168(k)(6)(A) steps the bonus rate down from 100 percent to 80 percent for property placed in service after December 31, 2022. That is a 2023 problem, not a 2022 one, but it is the kind of item a partnership that plans a capital purchase in the next eighteen months should put on the calendar now rather than rediscover in October.

1099-NEC at $600, and 1099-K at $600

The statutory floor for Form 1099-NEC reporting is $600 in nonemployee compensation paid in the course of a trade or business in a calendar year. The authority is IRC § 6041A(a) for fees paid for services and IRC § 6041(a) for the broader category of payments of fixed or determinable income. The $600 threshold has been the number since the modern 1099 regime took shape; what changed for 2020 was the separation of nonemployee compensation onto its own form. Form 1099-NEC returned to service for payments made in calendar year 2020 and is, for the 2021 payments a partnership is reconciling this January, the form you file for each contractor you paid $600 or more for services.

A general partnership that pays a graphic designer $700, a bookkeeper $2,400, and an outside attorney $1,500 in 2021 files three 1099-NECs by January 31, 2022, and sends copies to each recipient by the same date. The attorney-fee piece is its own rule: IRC § 6041A(a)(1) sends "gross proceeds" paid to an attorney in connection with a legal action to Form 1099-MISC box 10, but fees paid to an attorney for services rendered to the partnership go on Form 1099-NEC box 1. The line between the two trips a lot of partnerships that do not separate the two flows in their books.

The other $600 number is new. Section 9674 of the American Rescue Plan Act of 2021, Pub. L. 117-2 (March 11, 2021), amended IRC § 6050W(e) to drop the third-party network reporting threshold. For calendar years beginning after December 31, 2021, a third-party settlement organization must file Form 1099-K for any participating payee whose aggregate reportable payments in the year exceed $600, without the prior 200-transaction floor. The old threshold was $20,000 and 200 transactions; the new one is $600 and any number of transactions. A partnership that accepts customer payments through PayPal, Stripe, Square, or a similar platform will receive a 1099-K for 2022 activity even if the partnership is very small, and the partnership's gross receipts on its 2022 Form 1065 will need to reconcile cleanly to the 1099-K the platform files with the IRS.

The practical effect is that a general partnership accepting card or app payments has lost the reporting gap that previously made partnership gross receipts something the IRS could see only on the partnership's own return. The money was always reportable; the third party now reports it too, and the matching program runs on the difference. For partnerships that have been casual about which partner's personal Venmo receives client payments, the fix needs to happen before the February 2022 transaction cycle, not in January 2023 when the 1099-K arrives with the wrong name on it.

Build Back Better is dead, and the spring is quiet

Senator Manchin's December 19, 2021 statement on Fox News Sunday that he could not support the Build Back Better Act took the roughly $2 trillion reconciliation package off the 2022 legislative map as drafted. What mattered for partnerships in the November House text was a package of changes to IRC § 163(j), a new net investment income tax applied to active business income of high-income owners, and a tightening of the carried-interest holding period under IRC § 1061. None of those is law. None will be law on the current vehicle. A partner filing 2021 returns this spring is filing them against the rules as they stood on December 31, 2021, and a partnership doing January 2022 planning against a December 2021 draft bill is planning against a bill that no longer exists.

The same is true for the BBA audit regime. The centralized partnership audit rules under IRC §§ 6221 to 6241 remain the default for any 2021 return that cannot elect out under § 6221(b). The election-out criteria have not moved. Fewer than 100 eligible partners, all individuals or qualifying entities, no partnership or trust partners, and the election is on a timely-filed return with a Schedule B-2. Partnerships that elected out for 2018, 2019, and 2020 can elect out for 2021; partnerships that could not elect out have the push-out election under § 6226 available on a final partnership adjustment, and should still name a real partnership representative under § 6223 with the authority § 6223(b) gives that person.

What is true about the structure in January 2022

The general-partnership column on the entity-choice spreadsheet has three entries that earn their keep. No formation fee. No annual state maintenance filing in most jurisdictions. No CTA beneficial-ownership report under any currently pending rulemaking.

The same column has three entries that weigh against it. Personal liability under RUPA § 306 for every partner on every partnership obligation. Self-employment tax on the full distributive share of each general partner, with the Social Security portion now reaching $147,000 of the base. And the ordinary compliance tax of operating as a Subchapter K entity, which means Form 1065, partner K-1s, the BBA default audit regime unless you elect out, quarterly estimated tax at the partner level, and 1099 filings at the usual January and March deadlines.

Neither column has shifted much. What has shifted is the environment. An LLC's maintenance burden now includes a FinCEN filing that the general partnership's does not. The Social Security wage base has moved high enough that a two-partner shop with $300,000 of net earnings splits the OASDI cap almost exactly between the partners, and the marginal dollar above each partner's $147,000 is Medicare-only. And the payments an operating partnership receives through card processors or network platforms now generate a 1099-K at the $600 line, which means the partnership's books and the IRS's records are synchronizing for the first time at a level a casual filer notices.

The general partnership in 2022 remains the cheapest legal structure for a small American business and the most expensive legal structure for a small American business that gets sued. Both of those have been true for a hundred years. What is new is that for the first time in the post-2020 federal framework, the absence of a filing is itself the feature worth pricing.

Sources

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