The “Limited Partner” Label Won’t Save Clients from Self-Employment Tax

The Tax Court issued a decision on May 28, 2025, in Soroban Capital Partners, LP v. Commissioner, making it clear (again) that being actively involved in your business, regardless of your title as a "limited partner," does not exempt you from self-employment tax.

The question at hand was whether three individuals identifying themselves as "limited partners" could evade paying self-employment tax on their portion of the partnership's income.

The court’s answer? No

And the decision doesn't only affect private fund issues. If your clients are in partnerships—law firms, real estate funds, consultancies, you name it—this ruling could impact them in a big way.

Why This Ruling Matters to Your Clients

This case wasn’t about aggressive tax shelters or shady offshore strategies. It was about something much more common: professionals assuming that because their paperwork calls them a “limited partner,” they’re off the hook for self-employment taxes.

Well, they're not.

If your clients are active in the business—making decisions, bringing in revenue, managing people—the IRS isn’t going to treat them like passive investors.

And that means their share of the partnership’s income could be hit with self-employment tax.

Here are five key things you need to know from the Soroban decision:

1. Titles Don’t Mean Much if the Facts Show Otherwise

These three individuals had “limited partner” listed on paper. But the Court looked at what they actually did. And what they did was run the business.

They helped manage investments, handled key decisions, and played a large role in the firm’s success.

The Court said, If you’re that involved, you’re not a passive investor. And if you’re not passive, you don’t get out of paying self-employment tax.

2. It’s About Function, Not Form

The Court used what’s called a “functional analysis”—a fancy way of saying, let’s look at how you actually behave.

They considered things like

• How much time the partners spent on the business

• Whether they helped run operations

• If they had the authority to make binding decisions

• Whether their expertise was advertised to clients

Basically, if you are actively working in the business, you cannot be considered a passive partner, regardless of your title.

3. Capital Doesn’t Get You a Pass

Just because you invested money in the partnership does not mean you can consider yourself "passive."

In Soroban, the Court didn’t care how much the partners put in financially. WWhat mattered was the extent of their involvement in earning the income.

IIf your client is involved in day-to-day operations, they could be responsible for self-employment tax, even if they’ve invested capital.

4. This is Part of a Bigger Trend

Soroban isn’t an outlier. The Tax Court has been ruling this way for over a decade. Since 2011, there have been at least six major cases on this issue—and the IRS has won almost every time.

The momentum is clearly behind the IRS here. They are likely to continue emphasizing this point during audits and examinations.

If your clients are relying on their "limited partner" status to shield income, it’s time for them to reconsider.

5. Appeals Are Coming—but Don’t Count on a Quick Fix

Appeal cases such as Denham Capital and Sirius Solutions are already underway. Soroban might head that way too.

It's possible that one of these appeals will change the situation. But for now, this is the lay of the land. And unless something changes, this is how the IRS will proceed.

TL;DR:

⏩ Simply calling yourself a "limited partner" does not protect you from self-employment tax.

⏩ If you are involved in operations, making decisions, or working with clients, you are likely not considered a passive investor.

⏩ The courts are applying a "functional test" to determine eligibility, resulting in a loss for most taxpayers.

⏩ Capital investment is less important than the actions you take.

⏩ Until appeals change the situation (if they ever do), this is how the IRS will interpret the rules.

Let’s talk...

➤ Have any of your clients been counting on their “limited partner” title to stay out of self-employment tax?

➤ After Soroban, are you rethinking how you structure or advise on partnerships?

➥ Contact Attorney Stephen A. Weisberg for a free Tax Debt Analysis.

Contact Me Here: https://www.weisberg.tax/contact-1

Email: sweisberg@wtaxattorney.com

Phone/Text: (248) 971-0885

Address: 300 Galleria Officentre, Suite 402, Southfield, MI 48034