LLC Partner: Everything You Need to Know
An LLC partner or member is the owner of an LLC. 3 min read
2. LLC vs. Simple Partnership
3. Legal Status of LLC Members
4. How Are LLC Members Paid?
5. LLC Taxation
6. Management Structure
7. Becoming a Partner (Member) in an LLC
An LLC partner or member is the owner of an LLC. You can become a partner of an LLC either at the time of its formation or at a later date through a specific procedure set out in the operating agreement.
Limited Liability Company
Members of an LLC can choose to manage the business themselves or appoint a manager. An LLC offers other flexibilities as well. It can have any number of members, and a corporation too can be its member. Unlike in the case of corporations, there are no requirements for management reporting or state-mandated memberships.
An LLC is not subject to corporate-level income tax. It passes on its profits and losses to its members, who then pay the taxes at an individual level. Thus, it helps avoid double taxation. You also receive tax relief when the performance of your LLC is poor because you can set off the business loss against your personal income.
LLC vs. Simple Partnership
The LLC business structure is ideal for small and mid-size businesses. Unlike partnership firms, an LLC must register itself with the concerned agency of the state government (usually, with the secretary of state).
Unlike a simple partnership, an LLC keeps the personal assets and liabilities of the owners separate from those of the business. The LLC owners are protected against their personal liability, regardless of whether they are actively involved in the management of the company.
In terms of flexibility of operations and management, an LLC enjoys the advantages similar to a simple partnership firm. However, an LLC must file an informational report with the IRS in Form 1065. This report lists out each member's share in the annual earnings of the company.
Legal Status of LLC Members
Owners of an LLC are known as its members. They are not the partners or employees of the LLC. Being an owner of the business, you may work for an LLC, but that does not make you its employee.
How Are LLC Members Paid?
LLC owners do not get salaries or wages. They have a fixed percentage in the profits of the company. The operating agreement sets out the ownership percentage of each member. The amount of profits an LLC member receives is treated as his personal income for the purpose of federal income tax.
The members must also pay self-employment tax on the amount of business income they receive from their LLC. However, the inactive members who are not involved in the business or making decisions for the company may not have to pay the self-employment tax.
The IRS does not categorize LLCs under a separate type of taxation entity. It's up to an LLC to decide how it chooses to be taxed.
A single-member LLC can choose to pay taxes either as a sole proprietorship concern or as a corporation. Similarly, a multiple-member LLC can choose to file taxes either as a partnership firm or as a corporation.
The members of a multiple-member LLC may decide on the procedure for managing the company either by themselves (member-managed) or through a manager (manager-managed).
All the members of a member-managed LLC have equal rights of management. However, in case of a manager-managed LLC, the members usually appoint one or more members among themselves as "managers" for managing the affairs of the company.
Unless the operating agreement provides otherwise, most of the states consider an LLC as a member-managed company by default.
Becoming a Partner (Member) in an LLC
You become a member of an LLC if your name is included in the articles of organization, filed with and approved by, the secretary of state or other designated agency of the state government.
If you're not a founding member of an LLC and would like to be added as one, you must seek its approval. The LLC operating agreement usually contains procedures for adding and removing members.
If there are no specific rules in the operating agreement for adding new members, you must convene a meeting of the members, and amend the operating agreement to make provisions for addition of members.
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