Membership Requirements and Implications
Most state LLC laws require at least 1% ownership to be considered a member. Anything less would likely invite an IRS audit. A partner in an LLC can be an employee through an employment agreement listing compensation for services.
- LLC members have liability protection and flexibility in ownership like corporations and partnerships.
- There is no limit to LLC membership number unless taxed as an S-corp, which is capped at 100 shareholders.
- An active LLC member can’t receive W-2 income since they aren’t an employee.
- Customizable operating agreements establish unique structure and procedures.
Member Interests and Taxation
- LLC members employ managers with no ownership.
- A single-member LLC is not required to file a tax return since it’s a disregarded entity but could elect to be taxed as a corporation or partnership.
- Sale of membership interest sometimes occurs due to ownership changes. Operating Agreements specify the transfer process.
The term "member" refers to individuals or entities holding membership interest, similar to shareholders in a corporation.
- Membership interests are determined by the operating agreement.
- Interests can be broken into "units" or "shares."
- Since LLC finances are separate from members, creditors must file for a charging order to get payment from a member’s interest.
Dealing with Inactive LLCs
Inactive means no transactions or business activity. Until dissolved, the company legally exists. When inactive, you may still need to meet reporting rules. If a contract exists with a dissolved LLC, it remains legally binding. To dissolve, settle liabilities, divide property, then submit a dissolution statement.
Sole proprietors can convert to an LLC by following state formation rules. More complex entities involve more steps. Inactive members give up company management rights to avoid self-employment tax on profits. Cash investments determine LLC ownership percentages.