Is a Partner in an LLC an Employee?
Normally a partner within an LLC is not considered an employee. However, the members who become employees of LLC through employment agreement then they can be considered employees as well as partners.
In a Limited Liability Company individuals officially and legally form a legal entity to conduct business activities. But the real question is, are these partners in an LLC also considered employees? The simple answer to that question is, it depends.
Partners and owners in the LLC are generally referred as members. These partners are considered owners in the LLC so technically they share the profit and loss of the entity, therefore, one cannot call them employees says Falen O. Cox,
In normal situations partners of an LLC cannot be employees but with an exception of the presence of employment agreement they can provide services for the LLC for salary or compensation” says Corinne Chen.
When an LLC is taxed as a corporation then the company can choose to provide employment to the members as well can pays salaries also. The salaries and compensation for member employees should be according to industry standards.
How Does a Member Get Paid by an LLC?
LLC distributes profits according to the proportional ownership interest of each member but some LLCs take a different approach which is legally and officially outlined in the operating agreement of LLC. When an LLC is a pass-through entity in terms of the payment of taxes then members pay the taxes instead of LLC. Especially when the LLC is a multi-member entity then it cannot pay salary to the partners who are acting as employees. LLC distributes profits according to the standards of IRS and employees who are also the partners of LLC are taxed from their profits.
What if Your LLC Has Multiple Members?
Officially and legally LLC can add more members to its business if the initials of incorporation state the conditions. The operating agreement of LLC must clearly dictate how LLC will add more members and what kind of roles and obligations they are going to play.
How Does a Multi-Member LLC Work?
Members and partners within an LLC can be individuals, corporations and LLCs. In most of the cases there is only one member who is officially considered as manager of LLC. In an LLC, the members and partners are provided complete protection against their personal assets and the liabilities of LLC.
When LLCs are operating as multi-member entities then partners are taxed as general members. When an LLC wants to be taxed as S corporation then it can file form 2553, file form 8832 for being taxed as C Corporation.
How Do You Form a Multi-member LLC?
The basic reason for people to form a multi member LLC is to take the benefits of tax and liability protection. When you are thinking to establish a multi-member LLC it is best to understand the guidelines according to the state where you are willing to establish it. Here are some important elements that you need to keep in mind,
- Work on the basics first and check for availability of a particular name that synchronizes with the secretary of the state website. Collect information about various business licenses and permits that your multimember LLC requires.
- Properly draft and file the articles of organization for your LLC.
- Apply for an Employer Identification Number.
- Properly draft an operating agreement for all the members.
- Conduct an initial meeting of the members according to the operating agreement and execute a resolution authorizing members actions taken by members or managers, for example, opening a bank account.
- Open a separate bank account of LLC and keep the funds of the business in that account. This account should not mix up with the personal account of LLC owner and its authorized member according to the operating agreement.