Can an LLC member also be an employee of that LLC?

February 24, 2010 5:43 AM

Can a member of an LLC (filing as a partnership) also be an employee of the LLC? Details inside.

I am one member of an LLC. There are two other members. One is another individual, and one is a limited partnership. Our LLC files as a partnership (because one member is a partnership).

Can I (and the other individual member) be employed by the LLC (i.e. receive a W-2)? FWIW, not trying to do anything shady - we perform most of the functions of the LLC.

posted by entropic to law & government (8 answers total)

Consult your attorney. You're getting into tax law, an area where almost all lawyers, let alone laymen, cannot venture safely. My representation agreements with my clients spell out that I don't do tax law and that advice on any funds that come there way is to be gotte from someone else. That's how scary tax law is. Your question is a tax law question. When you go in, be sure to tell the attorney if you are filing as an S Corp.

Ignore any advice that goes beyond "get a lawyer."
posted by Ironmouth at 5:47 AM on February 24, 2010

I was hoping that this would be a pretty straightforward issue. Regardless, it's incredibly frustrating that there are so many obstacles to just running a business.

Yesterday a CPA told me I could not be employed by the LLC, but I've received conflicting information elsewhere, as well. Looks like we'll get to shell out even more money to our attorneys.
posted by entropic at 5:49 AM on February 24, 2010

Yesterday a CPA told me I could not be employed by the LLC, but I've received conflicting information elsewhere, as well. Looks like we'll get to shell out even more money to our attorneys.

This is a small question that a competent tax attorney could probably answer in a single phone call. It won't be that expensive. Its not as much money as you would shell out if you got audited. Also, I'd be very clear to the attorney if you are somehow trying to issue a W-2 for last year when you didn't actually pay yourself a paycheck. That is sketchy and he or she needs to be clear what exactly you want to do.
posted by Ironmouth at 5:57 AM on February 24, 2010

Thanks for the reassurance. Not trying to issue one retroactively, just planning ahead for this year. No paychecks were issued in 2009.
posted by entropic at 5:59 AM on February 24, 2010

Generally, partners in a partnership are not employees and don't get W-2s. Service partners who receive fixed amounts from the partnership (in addition to a share of residual profits) would normally treat these amounts as "guaranteed payments". All of this would generally be subject to self-employment tax.
posted by planet at 7:09 AM on February 24, 2010

I'm not a lawyer, so this is just my experience as a small businessman that has researched similar questions. Contrary to other opinions, I think this is the type of question you can either have an attorney for or do the research yourself. At the very least, it doesn't hurt to try answering for yourself before bringing in outside help, to gauge your ability to parse business and tax legalese and compare your final answer to an attorney's answer.

Your situation is unique and so you'd need to look into the basics of LLC member compensation options and any caveats related to your arrangement. NOLO LLC books will likely be available at your library and able to provide the framework so you can arrive at answers for your situation. When I researched this issue, the answer in my scenario was that members could not be employees. That was never stated in black and white, but the intended arrangement of scheduled or unscheduled distributions of profits to members being reported on Schedule K seemed clear.
posted by McGuillicuddy at 7:12 AM on February 24, 2010

Strictly speaking, yes, an LLC member can receive a W-2 from the LLC. If that LLC files taxes as an S-corporation.

Because you're filing as a *partnership*, it's handled differently. You're not eligible to file as an S-corp because one of your LLC members is a partnership--and the S-corp is what lets LLCs pay salaries to their members. When people say they're getting a salary as an LLC member, it's because they're an S-corp.

Guaranteed payments are the only thing you can do as a partnership, which basically means that you can continue to get money that does not decrease your equity in the LLC. It's still self-employment income, which sucks to a degree, but it does mean that if you and the other individual member both work full-time for the LLC and would make a reasonable salary of $50k/yr, say, doing the same thing elsewhere, and the LLC only makes $110k that year, then you'll still get your $50k apiece, and the amount left over will be what's treated as the LLC's income.

But there's no withholding done, it's not W-2 income. It's just a check the company writes you on a continuing basis.

As an LLC that's big enough to employ you both, you really need a CPA. Not just one you ask questions of, but a CPA who is *your* CPA on a continuing basis. And then they'll be able to help you make the best possible decisions as far as reducing your taxable income. Nothing wrong with lawyers, but this is not really something you need a lawyer for; you need someone with a lot of experience as a tax preparer for LLCs and partnerships.
posted by larkspur at 8:22 AM on February 24, 2010 [2 favorites]

I am a lawyer, but not your lawyer. The following is not legal advice and cannot be relied upon for the avoidance of tax penalties.

Planet's answer is correct. In general, equity owners of an LLC may not be treated as employees of that LLC.

I'm not sure why there are so many S corp references here, but with respect to an LLC that has elected to be taxed as a corporation (either C or S), equity holders may be treated as W-2 employees of such LLC.
posted by dbolll at 11:16 AM on February 24, 2010