Determining a member's participation in LLC activities.

• Author: Ellentuck, Albert B.
• Position: Limited liability company

ANY TRADE OR BUSINESS ACTIVITY OF A LIMITED liability company (LLC) in which a member materially participates is not considered a passive activity. Material participation is a year-by-year determination, and a member meets the material participation standard if he or she is involved in the operations of the activity on a regular, continuous, and substantial basis.

According to Temp. Regs. Sec. 1.4695T, a member is treated as materially participating in an activity if one of the following seven tests is met. The first four are objective tests based on the current year. The next two tests are based on participation in prior years, while the last one is a broad "facts and circumstances" test based on the statutory definition of material participation.

1. Hourly safe harbor: The member participates in the activity for more than 500 hours during the current year.

2. Primary participant: A member's participation in the activity for the current year constitutes substantially all of the participation of all individuals in the activity (including individuals who are not owners of interests in the activity).

3. Maximum participant: A member participates in the activity for more than 100 hours during the current tax year, and this is not less than the participation in the activity of any other individual (including individuals who are not owners of interests in the activity).

4. Significant participation activity aggregation: The activity is a significant participation activity (SPA), and the member's aggregate participation in all SPAs during the current year exceeds SOO hours. (An SPA, generally, is an activity in which the member participates for more than 100 hours during the year but which does not qualify as a material participation activity under any of the other six tests.)

5. Historical participation: The member materially participated in the activity for any five years (whether or not consecutive) during the 10 years immediately preceding the current year.

6. Personal service activity: The activity is a personal service activity (professions and trades in which capital is not an income-producing factor), and the member materially participated in the activity for any three years (whether or not consecutive) preceding the current year.

7. Facts and circumstances: If a member is not a material participant under tests 1-6, but based on all of the facts and circumstances the individual participates in the activity on a regular, continuous, and...