Is a Partner in an LLC an Employee?

By Larissa Bodniowycz, J.D.

Is a Partner in an LLC an Employee?

By Larissa Bodniowycz, J.D.

Business partners who own part of a limited liability company (LLC) are referred to as members, not partners. Members own a percentage of the company like corporate shareholders. Whether members can be employees depends on the LLC's tax status. Even when members cannot be paid as employees, there can still be compensation for the work they do for the business through member draws.

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The Role of Tax Status

LLCs are usually taxed on a pass-through basis, meaning the members pay taxes on the business's income on their personal income tax return. Members usually cannot be considered employees when the business is taxed on a pass-through basis. Though members who provide services to help with management are considered self-employed and are therefore responsible for paying self-employment taxes on their share of profits. These restrictions do not prevent the LLC from hiring other employees, though, as they are free to hire nonmembers as employees.

LLCs can depart from default pass-through taxation by electing to be taxed as a corporation, specifically either a C corporation or an S corporation. Either form of corporate taxation can pay members that do work for the LLC as employees. Members paid as employees do not have to pay self-employment taxes because the taxes are taken out of their paychecks.

Paying Nonemployee Members

LLC members often dedicate much, if not all, of their working hours to helping run the business. Members can still be paid for their hard work, even when they cannot be paid as employees. These members can be paid as independent contractors or through a "draw."

Members paid as independent contractors are paid like any other independent contractor for their work, and they must pay self-employment taxes on money earned as an independent contractor. LLCs that take this approach should create an independent contractor agreement that lays out the details of the independent contractor relationship with the member.

Members can also be paid through draws. A draw is a distribution of part of the LLC's income to a member. In small businesses, draws are typically paid monthly or quarterly. Having an internal accountant can help the with the decision on the appropriate amount for member draws and how to account for them. Draws are typically only made when the business has profits.

Obtaining an EIN to Hire Employees

An LLC must obtain an employer identification number (EIN) from the Internal Revenue Service (IRS), which can be done in a few minutes through the IRS online application, to hire employees of any type. Single-member LLCs with no employees do not need to obtain an EIN, while all multiple-member LLCs must obtain one, even if they do not have employees.

With all of the different legal responsibilities and aspects associated with each type of LLC, determining how to pay your employees may seem like a tricky decision. A licensed business attorney in your state can help you with these and other decisions related to owning and operating your business.

This portion of the site is for informational purposes only. The content is not legal advice. The statements and opinions are the expression of author, not LegalZoom, and have not been evaluated by LegalZoom for accuracy, completeness, or changes in the law.