Can an LLC Partner Claim a Business Income As Self Employment?

By William Pirraglia

From a legal perspective, there are no partners in an LLC, only owners -- who are called members. LLC members, in most cases, "must" claim business income as self-employment earnings. LLCs are "pass through" businesses, with all profits and losses treated as self-employment personal income or loss. However, there are a few options to treat LLC income differently.

Multi-Member LLCs Are Like Partnerships

LLCs with more than one member are automatically treated like partnerships. However, multi-member LLCs can choose to be taxed as partnerships or corporations. In most cases, however, all LLC income is treated as personal, self-employment income, without regard for a member's personal preferences. This is similar to classic partnership tax treatment.

Other Member Tax Options

LLCs, as entities of the state, not federal, government, must abide by individual state regulations. Absent other permitted modifications, members always receive LLC income as personal income, as if generated by self-employment. For federal income tax purposes, LLCs can elect to be treated corporations. They can choose to be taxed as C corps, with LLC profit distributed as dividends, or S corps, which act like LLCs as pass through companies with profits treated as earned income to members.

Ready to start your LLC? Start an LLC Online Now

Why Partners Are Members

Although the term "partners" is not used, in a smaller LLC, the members are actually partners with other members. Because of the protection of limited liability, like that afforded owners of corporations, LLC members have much safer positions than partners, who are exposed to unlimited liability in a classic partnership. The hybrid business structure of an LLC -- somewhere between a partnership and a corporation -- offers the benefits of both a partnership and a corporation.

Members Have Self-Employment Income

In most states, LLC members are not permitted to be employees, and must receive their share of the profits as personal self-employment income. While this treatment is not typically a choice, most LLC members benefit as personal tax rates are usually lower than corporate tax levels. Were you in a partnership, you'd receive the same tax treatment without the limited liability protection offered by the LLC. While you may not have the choice to have LLC income treated as self-employment income, you may enjoy the typical lower tax rates. Choosing corporate taxation means that LLC members who work for the company can become employees -- if they truly perform verifiable work -- and receive compensation. LLC members who are just investors, however, cannot enjoy employee status and must receive income as dividends.

Ready to start your LLC? Start an LLC Online Now
Is a Partner in an LLC an Employee?


Related articles

Tax Differences of LLCs & PCs

A limited liability company is a company, typically with a small number of owners, known as members, that enjoys the same limited liability benefits as a corporation. All states now allow one-member LLCs; some states allow professionals to form professional limited liability companies, or PLLCs. A professional corporation, or PC is a special type of corporation designed for professionals such as lawyers and accountants. LLCs and PCs are taxed quite differently.

Difference Between LLC & LLP

An important aspect of starting a business is choosing which type of business entity to create. Two popular business entities are limited liability companies, or LLCs, and limited liability partnerships, or LLPs. Each entity has unique characteristics, but both are also similar in many ways, including the way they are taxed by the IRS.

Advantages & Disadvantages of a Limited Liability Company

A limited liability company, or LLC, is an entity that offers both advantages and disadvantages to a business owner. The advantages can range from liability protection to tax benefits, while drawbacks may include lack of uniformity and consistency among the state statutes governing LLCs. A savvy business owner should consider all these advantages and disadvantages before deciding whether a limited liability company is the preferred structure for her enterprise.

LLCs, Corporations, Patents, Attorney Help

Related articles

Can I Have a Partner With an LLC?

A Limited Liability Company is a common business entity that may be owned and managed by one or more individuals. LLCs, ...

Comparison: LP and LLP

When forming a new business, it is important to select an appropriate business structure. You may consider a number of ...

Advantages & Disadvantages of LLC Vs. LLP

A limited liability company is owned by members and is a mix of the features of a corporation and partnership; the ...

Subchapter S Corp Restrictions

Most people decide to incorporate their small businesses for the protection it gives them from personal liability for ...

Browse by category
Ready to Begin? GET STARTED