LLCs and liability for self-employment taxes.

• Author: Grace, Michael J.
• Position: Limited liability companies - Brief Article

Letter Ruling 9432018 apparently represents the first written determination in which the IRS has addressed an important open issue for members of limited liability companies (LLCs). The Service ruled that a member's distributive share of an LLC's trade or business income will be subject to self-employment tax. Like many other recent rulings, the ruling primarily addresses the conversion of a general partnership to an LLC. The LLC would engage in the performance of unidentified "professional services" and the management and operation of any property that came to the partnership by way of fees or investment. All partners would continue to be actively engaged in the business.

Sec. 1402(a) generally includes in "net earnings from self-employment" (NESE) an individual's distributive share of income or loss (as defined in Sec. 702(a)(8)) from any trade or business carried on by a partnership of which the individual is a partner. However, Sec. 1402(a)(13) generally excludes from NESE a limited partner's distributive share of partnership income. Practitioners have been unsure whether (and in what circumstances) LLC members might qualify for the exception. After all, if an LLC...