A business partnership, like any other business, needs someone to run the day-to-day activities. The two options for a manager in a partnership are a partner taking on those duties or an outside manager being hired. This article discusses the partner-as-manager option. This partner, called a managing partner, has a role similar to a CEO of a corporation.
If the partnership didn’t have a manager, each partner would have to participate in the business; a situation that becomes unworkable if there are more than a few partners. Having someone who can deal with day-to-day activities frees other partners to work on the main focus of the business.
Information about Managing Partners
The managing partner has two hats: working as a partner doing business, and as the general manager.
Who Does The Managing Partner Report To?
The managing partner usually reports to an executive committee of the partnership, similar to a board of directors for a corporation.
How Does The Managing Partner Get 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 Does The Managing Partner Pay Income Tax?
The managing partner pays income tax on both the distributive share and the guaranteed payments. The partner reports both of these payments on Schedule E on their personal tax return.
Partners are also considered self-employed so they must pay self-employment taxes (Social Security/Medicare tax) on their share of the partnership’s income.
What Liability Does The Managing Partner Have?
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. 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.
How Does The Managing Partner Act For The Partnership?
The managing partner is an agent of the partnership, having the authority to act on behalf of the company in buying and selling, signing contracts, and dealing with employees.
Does a Managing Partner Need a Contract?
All executives should have a contract for the benefit of both parties. Since this partner is not an employee, this is a different type of agreement than an employment contract.
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 Member in a Limited Liability Company (LLC)
A limited liability company with several members is taxed like a partnership and it has some of the same structures as a partnership. LLC’s function in a similar way to partnerships, with members instead of partners and an operating agreement instead of a partnership agreement.
LLC’s need someone to manage the day-to-day operations, either an outside manager or a member as manager. The member-manager functions in a similar way to the managing partner, with responsibility for managing the operations of the business and implementing decisions of the members.
Before you consider a managing partner for your partnership or member-manager for your LLC, prepare a job description and a management agreement. Get the help of an attorney to prepare these documents, to make sure they align with state laws and tax regulations.