Avoiding SE tax on a "passive" LLC member


B

bill

Given a one-member LLC where the member neither manages nor
works in the business: it is run by a non-member manager,
which makes this a "manager-managed company" (Florida
statues). Am correct in saying that the member is not
subject to self-employment taxes?

Thanks
 
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D

Drew Edmundson

bill said:
Given a one-member LLC where the member neither manages nor
works in the business: it is run by a non-member manager,
which makes this a "manager-managed company" (Florida
statues). Am correct in saying that the member is not
subject to self-employment taxes?
No. The rule you seem to be trying to bring the LLC under
relates to limited partners. By definition a partnership
has TWO or more owners. You only have one so you can't get
under the limited partner rule.

An "S" corporation *might* have been a better choice in
these circumstances.

Drew Edmundson, CPA (NC)
 
S

Stuart Bronstein

No. The rule you seem to be trying to bring the LLC under
relates to limited partners. By definition a partnership
has TWO or more owners. You only have one so you can't get
under the limited partner rule.
A limited partnership needs two partners. But a limited
liability company can be formed with only one member. At
least that's the rule in California. See California
Corporations Code Section 17050(b).

Stu
 
B

bill

No. The rule you seem to be trying to bring the LLC under
relates to limited partners. By definition a partnership
has TWO or more owners. You only have one so you can't get
under the limited partner rule.

An "S" corporation *might* have been a better choice in
these circumstances.
Would this then hinge on whether Florida allows
single-member LLC's?

I understand what you are driving at, but I am not asking
about a liability issue. (Limited liability is afforded all
members of an LLC, right? Regardless of their level of
participation in the affairs of the LLC. I don't believe
there is a parallel between "ordinary" and "limited"
partners vis a vis active and not-active members of an LLC.
The question is "when are members of an LLC subject to SE
taxes and when are they not?" And, what is it that makes one
member of an LLC subject to SE taxes while another member is
not.

Thanks.
 
D

Drew Edmundson

A limited partnership needs two partners. But a limited
liability company can be formed with only one member. At
least that's the rule in California. See California
Corporations Code Section 17050(b).
I am confused by the purpose of this post. I never said an
LLC couldn't have only one owner. The original poster
seemed to be asking if he could take advantage of the rule
that says limited partners don't owe SE tax on their limited
partnership profits.

My response was no since a partnership requires TWO or more
partners. Because his LLC has only one owner it is not a
partnership (for tax purposes) and the owner can't be a
limited partner. Therefore he owes SE tax.

Drew Edmundson, CPA (NC)
 
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D

Drew Edmundson

Would this then hinge on whether Florida allows
single-member LLC's?
No bearing. See my response to Stuart.
I understand what you are driving at, but I am not asking
about a liability issue. (Limited liability is afforded all
members of an LLC, right? Regardless of their level of
participation in the affairs of the LLC. I don't believe
there is a parallel between "ordinary" and "limited"
partners vis a vis active and not-active members of an LLC.
The question is "when are members of an LLC subject to SE
taxes and when are they not?" And, what is it that makes one
member of an LLC subject to SE taxes while another member is
not.
I am not answering about liability - I leave that to the
attorneys. An LLC is, by default, a disregarded entity
(DE) for tax purposes so we have to look at ownership.

The default classifications are:

One owner - LLC is taxed as part of its owners return
Two or more owners - taxed as a partnership
Other classifications are possible if foreign LLCs are
involved. I have ignored them.

So when the sole owner of a LLC operating a trade or
business is an individual the business is reported and taxed
as a sole proprietorship and the owner must pay SE tax on
the profits. This applies whether the sole
proprietor/single owner of the LLC is active or not. By
active I am not referring to the Section 469
Active/Passive/Material participant rules but using the more
general english usage.

Different results are possible depending on the activity of
the LLC. For example a LLC with a residential rental
property owned by one individual would be generally be
reported on Schedule E as a rental.

When an LLC is taxed as a partnership the law is unclear as
to when SE tax is owed. The law states that limited
partners (no mention of LLCs) do not pay SE Tax on their
limited partnership profits. Some claim that since a LLC is
*like* a limited partnership the owners are not subject to
SE tax. Others disagree. IRS tried to issue a regulation
on this matter but Congress placed a moratorium, which has
since expired, on the regulations. IRS has chosen not to
revisit this area.

A dog is like a cat. Both have fur, four legs, a tail and
are domestic pets. But in my book that doesn't make a dog a
cat.

But regardless of how you feel on the whole SE Tax of LLC
members in a tax partnership it is a moot point in your
case. You don't have a tax partnership, you have a tax sole
proprietorship.

Drew Edmundson, CPA (NC)
 
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