The main consideration for why an LP would potentially receive a K-1 is whether they have received a K-1 previously.
- If “Yes”, K-1 will be necessary → The IRS has a record of the LP being in the fund and holding an account balance in their capital account. We need to zero this out and either assign the balance to a new investor if a transfer was executed, or allocate their share to the rest of the LPs pro rata.
- If “No”, the K-1 will not be necessary → It would be as if the LP never entered the fund.