Is a Partner in an LLC an Employee?

By William Pirraglia

From a legal perspective, there are no "partners" in an LLC, only owners, or "members." State laws differ, but in almost all jurisdictions, members, like partners in a standard partnership, cannot be W-2 employees. Most states specify that members will receive their proportionate share of LLC profits, as stated in the company's operating agreement. These profits -- or losses -- are treated as personal income on the appropriate partnership distribution forms.

LLC Members Are Seldom Employees

Unlike corporations, which can have any number of employees who are also owners -- by buying stock in the company -- LLCs are treated differently. These business structures, like partnerships, are "pass through" organizations, paying no income taxes themselves. All profits pass through the company to the individual members. While an LLC can have employees, members must perform direct and consistent management services to receive the additional status of employees.

State Differences

Theoretically, LLC members cannot be classified as employees as a method to minimize self-employment taxes. While "fictitious names," like those used for DBA -- doing business as -- designations can be used, fictitious jobs cannot be created to save personal self-employment taxation. Should you hire a professional manager or other non-member employees, you can pay salaries and payroll taxes. However, members, often even managing members, are taxed as the LLC chooses -- partnership or corporation owners.

Ready to start your LLC? Start an LLC Online Now

Taxation

LLCs are not specifically recognized for separate taxation by the IRS, and can choose to be taxed in three basic ways. Single-member LLCs can be taxed as sole-proprietorships -- called "disregarded" entities -- or corporations. Multi-member LLCs can select to be taxed as partnerships or corporations. If corporation taxation is selected, LLCs have a wider latitude to have employees, even members. LLCs treated as corporations have wider latitude to employ members as employees.

State Regulations

Since LLCs are "creatures" of the state and not the federal government, your state regulations govern your options to treat one or more members as employees. In all cases, even if permitted to have members serve as employees, owners must provide useful and consistent services contributing to the operation of the LLC. Stay current with your state regulations, as legislation can change annually. Just as many large organizations prefer the "corporate-friendly" regulations of Delaware and Nevada, you might be in a state that is LLC-friendly. You must work within the LLC regulations of your state, which may or may not allow you to have one or more member-employees.

Ready to start your LLC? Start an LLC Online Now
Can an LLC Partner Claim a Business Income As Self Employment?
 

References

Related articles

Advantages of Forming an LLC in Nevada

A limited liability company (LLC) is a form of business organization that offers limited liability and no double taxation of company distributions. An LLC is governed by the law of the state in which it was formed, and every state has its own set of LLC laws. Nevada LLC law offers certain unique advantages to LLC members.

Can I Pay Myself As an Employee As the Owner of an LLC?

A limited liability company is a relatively new form of business organization that combines elements of a corporation and partnership. These entities are often relatively small businesses, which typically means that at least some of the owners work on the LLC’s behalf. If you own an LLC and work for it as well, you may qualify as an employee. This is an important distinction because it may influence whether you or the business have an additional tax burden.

Tax Advantages of a Single Owner LLC Business Entity

A limited liability company, or LLC, is a form of business structure authorized by state law. An LLC is not a business entity recognized by the Internal Revenue Service for tax purposes. Rather, an LLC must elect to be taxed as one of the business entities classified by the IRS. LLCs owned by a single member may elect to be taxed as a corporation or sole proprietorship disregarded entity, which conveys significant tax advantages.

LLCs, Corporations, Patents, Attorney Help

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 ...

The Definition of an LLC Member

An LLC member is an owner of the company. All owners of LLCs are classified as members. Just as the owners of a ...

An S Corporation Vs. a Partnership: Pros & Cons

Whether you choose to run your business as an S corporation or a partnership has a number of significant effects, ...

Can an S-Corp Own an LLC?

An S corp may own up to 100 percent of an LLC, or limited liability company. While all but single-member LLCs cannot be ...

Browse by category
Ready to Begin? GET STARTED