Proposed regulation classifies LLC members for self-employment tax purposes.

• Author: Sturni, Michael A.
• Position: Limited liability companies

The Service has proposed amendments to the Sec. 1402 regulations on the tax on self-employment income. Under Prop. Regs. Sec. 1.1402(a)-18, self-employment income includes a member's distributive share (whether or not distributed) of income or loss from a limited liability company (LLC) unless the member is treated as a limited partner. For purposes of the proposed regulation, a member is any person who owns an interest in an LLC.

Under Sec. 1402(a)(13), selfemployed income does not include a limited partner's distributive share of income or loss from a partnership, other than guaranteed payments described in Sec. 707(c) to that partner for services actually rendered to or on behalf of the partnership (to the extent that those payments are established to be in the nature of remuneration for those services). A member of an LLC will be treated as a limited partner for purposes of the exception in Sec. 1402(a)(13) only if (1) the member is not a manager of the LLC and (2) the entity could have been formed as a limited partnership rather than an LLC in the same jurisdiction and the member could have qualified as a limited partner in that limited partnership under applicable law.

For purposes of the proposed regulation, a "manager" is a person who, alone or together with others, is vested with the continuing exclusive authority to make the management decisions necessary to conduct the business for which the LLC was formed. Generally, an LLC statute may permit the LLC to choose management by one or more managers (whether or not members) or by all members. If there are no elected or designated managers (as so defined) of the LLC, each member will be treated as a manager for purposes of the proposed regulation.

For purposes of the proposed regulation, an LLC is an organization (1) formed under a law that allows the limitation of the liability of all members for the organization's debts and other obligations within the meaning of Prop. Regs. Sec. 301.7701-2(d) and (2) classified as a partnership for Federal tax purposes. The applicable tests for determining whether an entity may be classified as a partnership for Federal tax purposes are set forth in Regs. Secs. 301.7701-2 through -4.

Whether an organization is to be treated as a partnership or as a corporation must be determined by taking into account the presence or absence of each of the following corporate characteristics: (1) associates, (2) an objective to carry on business and divide the...