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Ditto what Ski said. However, here are some additional thoughts. An LLC is, in every state that I know of, a seperate and distinct legal entity(person). The LLC enters into valid, enforceable, contracts and the relationship, e.g. employer/employee, debtor creditor, etc., are recognized by all concerned including IRS (the government). In fact, in U.S. Treasury Regulations 1.7701-3 the government clearly states that the entity (LLC) can be disregarded (as a seperate entity) and reported as a branch operation of the owner (MEMBERS). So, if the LLC employs the individuals they are reported on employment tax returns and the wages and employument taxes are deducted to arrive at net income of the LLC. The LLC then is reported on, say a partnership that had the membership contribuited to it by the individuals, as a branch operation of the partnership in accordance with the regulations. This way the section 199 deduction/credit applies if the business makes a product. Food for thought. If you have to pay employment tax, or SE tax, anyway why not look for some advantages? What about other employee benefits, such as group term life insurance, pensions, etc. Ski? Your thoughts?
Partners cannot be employees of the partnership just as sole proprietors cannot be employees of their own businesses, but members of an LLC can be employees of the LLC and in some states, if not all, "active members" (or managing members) are treated as if they are in an employee/employer relationship with the LLC. It would be very difficult, if not impossible, for the IRS to ignor or negate this legal relationship. I know of two cases where the IRS has take opposite points of view on these issues. I hope at least one of them goes to trial so we can have some precidence to follow. Maybe Congress will address the issues? NOT anytime soon.
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