Why your Bifurcated Farm Ownership Deserves Another Look

If your farm operation is an LLC taxed as a partnership that uses separate manager and nonmanager ownership interests, it is time to review that arrangement. A recent court decision puts more attention on who actually runs the business instead of what type of ownership your agreement says.

On September 17, 2026, the Second Circuit affirmed the Tax Court in Soroban Capital Partners LP v. Commissioner. The investment management firm’s three principals were allocated approximately $141.5 million during 2016 and 2017. They paid self-employment tax on guaranteed payments for services but excluded those distributive shares because they held limited-partner interests.

This ruling is important if your LLC has an owner that holds one interest for management and another for investment. This ownership structure that is commonly known as “bifurcated interest”. One of the results – aside from the economic and legal protections of a limited member for that portion of ownership - is that only the income allocated to the management interest and respective guaranteed payments are subject to self-employment tax while excluding qualifying investment income. Generally, in the operations I’ve seen, the investment interest is the majority of interest held by the individual and the management interest is almost a token amount (49% nonmanager and 2% manager interest).

In Soroban, the principals worked full time, managed the business, and helped generate its income. The court determined that a qualifying limited partner must have limited liability and must not run, manage, or control the partnership. That probably feels pretty similar to how your bifurcated interest seems to work. Signing leases, negotiating financing, purchasing inputs, and directing employees demonstrate management responsibility and – if you own more than 51% of the operation; – there isn’t anyone that can overrule your decisions.

There is still support for properly structured bifurcation. The 1997 proposed regulations permit qualifying arrangements with separate classes, identical rights and obligations within the relevant class, and a substantial, continuing interest held by qualifying limited investors. At least 20% ownership of that class is considered substantial. With how the Internal Revenue Code works, we can look to proposed regulations for guidance. Also, Soroban is an investment management firm structured as a limited partnership; which - on the outside - is probably quite a bit different from your family farm’s LLC.

However, that guidance is nonbinding and predates the appellate ruling. The exclusion therefore deserves careful analysis before assuming it remains available. I would recommend reviewing the following with your CPA and attorney:

1. Ownership and responsibilities. Compare the agreement with actual operations. Identify who makes decisions, signs contracts, and performs services. Review each investor’s activities separately. It’s important to support why – as a member of a manager-managed LLC – the economic and legal rationale for one individual to have two types of interest that (when aggregated) give them a controlling interest of the operation.

2. Support for the tax position. Confirm the ownership classes, capital contributions, allocation provisions, and investor rights satisfy the proposed regulations. Keep your supporting analysis documented and revisit it when ownership or management changes.

3. Financial consequences. Calculate the potential additional tax. Discuss whether current reporting should change and whether prior returns need further review.

Try to bring it up in discussion with your tax planning before year-end. Paying a reasonable guaranteed payment alone does not establish that remaining partnership income escapes self-employment tax. It’s important that your farm operates in the manner that your operating agreement says it should and that tax reporting reflects both operations and legal agreements. That feels like putting the cart before the horse for a lot of farmers but – when it comes to law – you need to run your farm how you said you would and be taxed accordingly.