Discussion:Can LLC consist with only limited partners?

To answer your question regarding the SE issue, it looks like the best reference is Proposed Reg 1.1402(a)-2(h)(2). This essentially states that an LLC member is a limited partner and not subject to SE tax unless he has personal liability for debts against partnership, has authority to contract on partnershps behalf, or participates in partnerships trade or business in excess of 500 hours for the year. Additionally, if business involves performance of services any member who provides such services is considered a general partner for SE purposes.

I believe your question is justified. If they aren't paying any payroll or issuing any 1099's, I would suspect at least one of the members is acting in a manner similar to a GP for SE purposes and should pay SE tax.

Please tell me it ain't so.

"The G/P in most cases would be drawing a W-2 salary"

Please tell me it ain't so.

If this is an LLC treated as a partnership for income tax purposes, the several issues involved in the Self-Employment status of the members of the LLC are such a mess that *even Congress* won't get its hands dirty anymore. We do not have answers to your questions, Pink Pearl.

Please don't go with Jctmstx's startingly bold assertions without checking them out on your ouija board...

It's very possible for an LLC to not have any members that owe SE tax. But in the example presented, I would advised to at least dig a little deeper to make sure treatment is correct under 1.1402(a)-2. How is the income being generated? How much time do the members devote to the business. If the members aren't devoting time to the business, aren't involved in business decisions, and there is no payroll or mgt fees, where are the profits coming from?

Remember, from a legal standpoint, ALL members of an LLC are limited partners. That's the whole reason they were dreamed up to begin with.

It's just when you start stirring in the tax concerns that things get complicated.

What's the name of the case out in the midwest where the pig farmers were allowed to claim losses under Section 469 because .. because .... Oh, I guess I *do* have to read the case again, I can't even remember what it said.

Who's got that name?

Although not directly connected to the SE issue, Garnett and Thompson have further muddied the situation.

The prior CPA might have it right; however in a prior thread a Dr H said, "This falls under the 'pigs get fat and hogs get slaughtered' maxim of tax planning".

Probably an issue that should be discussed with each of the 3 members before completing the tax return.

Reg. 1.1402(c)-1

TaxMaster should read IRC Section 469 and the Garnett case, mentioned above, I think. [Cite: Garnett, 132 T.C. No. 19]

LLC's were the work of the devil if you ask me :)

Please read the Garnett case [132 T.C. No. 19]; the court in that case just ruled the opposite of the above quote.

This is where I get confused. They want to be able to take losses above investments as a general partnership, but if the LLC then dictates that they have limited liability and thus are limited to the deductions.....how to respond to that?

So for purposes of the limitations on deduction of passive losses and credits, you must apply the material participation tests without applying the presumption of IRC Sec. 469(h)(2).

Note that this case does not involve the self-employment tax issue, which as Riley says may get you a different result.