Discussion:LLC partnership question
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Www.cpa1.biz (talk|edits) said: | 8 January 2007 |
| Almanacers,
Are all LLC partners considered general partners for S/E purposes? I know that in a regular partnership there is a general partner who will pay S/E tax from income other than guaranteed pymts and limited partner who only pays S/E tax on gauranteed pymts. I dont know how it works with LLC partnerships. You all have any insight on this. Bj | |
| 8 January 2007 | |
| That would depend on the legal aspects of the LLC. Did I mention lately that I hate LLC's? The LLC agreement should state what each partner will assume and receive from the ptnrshp I would assume :) | |
| 8 January 2007 | |
| The beauty, and the expense, of partnerships is that it is all in the agreement. All members can be general, limited, or a combination of the two. | |
| January 8, 2007 | |
| Bj - Sandy and Will are both correct. The partners' classifications (general or limited) can be found in the LLC agreement that was created when the LLC was formed.
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| January 8, 2007 | |
| Not really. LLC's by definition are limited partners. Those are the state regs for them, hence the name, limited liability. However, we know that when a member is actively involved, he's got some SE income. The question becomes how much. There are many threads on this, but right now, it's a free for all...you can be as aggressive or conservative as you like and may prevail since there are NO final regs. What's right? Kind of the corp issue: What's a reasonable salary? Make that a guaranteed payment subject to SE and let the remaining profits flow thru without. But that's one man's opin only. | |
| 8 January 2007 | |
| I went to a very interesting lecture on this topic a year ago. I don’t have my notes in front of me, but the jist of the lecture (applying Washington State Law) was that if it is a member managed LLC then all members have self employment income. If it is a manger managed LLC then some members are able to avoid self employment income. I seem to recall that it may have something to do with the member's ability to contract on behalf of the partnership. Once I get back to my office I’ll look for the handout from the lecture and see if I can add anything.. | |
Www.cpa1.biz (talk|edits) said: | 8 January 2007 |
| Ya,
I know we were talking about this for S-corps LLCs but not Partnerhips LLCs. This is a hot topic but what you are saying JR does not go well with an LLC partnership (not paying S/E taxes other than gauranteed pymts). If you are actively involved, there is not getting away from paying S/E taxes on gauranteed pymts and the remainder of distributed income versus a limited partner who cannot be actively involved that will only pay S/E Taxes on the guaranteed pymts....Do you have some more insight on this JR? Please advise. Bj | |
| January 8, 2007 | |
| The LLC is a new kind of entity, not anything that existed before. It is NOT a partnership, tho' IRS decided to have it file taxes as one. Its members are limited members, more like a limited partnership than a general. A manager is more like a general partner in the sense that there is an active member, who should probably have some earnings devoted to SE tax. This is more complex than many would have us believe. The IRS isn't interested in the law or the theory, but merely collecting SE tax as easily as possible. So to default to any thinking like, well, it's a partnership, so therefore....is just wrong. IT is not a partnership. IT is an LLC, and new kind of entity, which IRS has chosen to file as a partnership, but for which the partnership rules should not all necessarily apply. I simply see it as far more akin to an S corp than anything else. Shareholder/members earning profits not subject to SE, and managers/officers earning wages for their services. That's the best category in my own mind. Subject to change. Now you understand why I think this the way I do. | |
| 9 January 2007 | |
| Since the proposed regulations on this issue were never finalized, I am not sure that there is a "correct" answer.
Under the proposed regs, a member who has the legal authority to sign contracts on behalf of the LLC is automatically excluded from the definition of a “limited partner.” Also, a member having statutory liability for LLC debts by virtue of his position as an LLC member is excluded from the definition of a limited partner (this would be rare). A member who works more than 500 hours in the LLC is generally excluded from the definition of a limited partner. However, under the proposed regulations, a member working more than 500 hours during the year would be a limited partner if limited partners (other than those members having the authority to sign contracts on behalf of the LLC, or those members working more than 500 hours, or those members having personal statutory liability for LLC debts) own a “substantial continuing interest” (20% or more) in the specific class of membership interest owned by that member. Finally, service partners in service partnerships are generally excluded from the definition of a limited partner. | |
| 9 January 2007 | |
| I thought the check the box regs took confusion out in this regard JR1. If you choose to be taxed as a partnership then the partnership statutes apply, association then corporation ect. How are you choosing which partnership rules to apply and which ones to not apply? The regs? | |
| January 9, 2007 | |
| Will, the check the box regs merely let you agree with the IRS expediency of being taxed as a partnership, but I respectfully can disagree with Riley, since there is no correct answer right now. Everything he writes about limits on that limited membership interest come from IRS. They are not the arbiter of how LLC's should operate nor be taxed. Rather, Congress is. And the original intent of LLC's is likely opposed to those IRS proposed regs. All I'm trying to suggest is that since there are no final regs, and since IRS may or may not be proposing regs in keeping with the original intent...is keep your helmet on and use your head. Don't agree to blindly follow the IRS' decision to make LLC memberships identical to partnership interests, when they may well be more like S corp interests. Who's to say? Congress. Oh, yeah, Democrats now...Oh, well. | |
