Like the poor little bird in the Dr. Seuss book that struggled to identify its mother, it can sometimes prove difficult for partners in a partnership to identify their partners for federal income tax purposes. Partnerships for tax purposes include general partnerships, limited partnerships and limited liability companies taxed as partnerships. The federal income tax rules regarding partnerships are infamously complex and the rules for determining when someone is a partner are no exception. Many businesses operating as partnerships do not realize that issuing equity in the partnership to an employee makes that employee a partner for tax purposes and that issuing certain options, warrants, convertible debt or other similar financial interests in the partnership may make the holders of those interests a partner for tax purposes. If your partnership is considering issuing equity or other financial interests in the partnership, talk to your tax advisor first to avoid any unintended addition of partners or other unintended income tax consequences.
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