For Your Better Understanding Of Member Classes In An LLC

The Following Four Paragraphs Are A Copy And Paste From https://smallbusiness.chron.com/dual-llc-66532.html

LLC Business Structure

The LLC business type fits in between a partnership and a corporation. The owners of a LLC get the same liability protection as with a corporation. However, a LLC is much less costly and complicated than a corporation to set up and maintain. A small business LLC will pass through earnings and deductions to the owners exactly the same as with a partnership structure. The company does not pay income taxes. The owners, called members of a LLC, then report their proportional share of the LLC financial results on their individual tax returns.

Two Classes of Members

The Internal Revenue Service and state regulations have allowed LLCs to be formed with two classes of members. General members are the owners who are actively involved in managing and running the business. Limited members are owners whose activity is limited to being investors in the business. A limited member has no say over how the business is managed. A dual class LLC allows the general members to contribute with "sweat equity" if they do not have the financial asset to fund the business. The limited members get the benefits of pass through income and deductions to use on their taxes.

Self-Employment Insurance

Members of a regular LLC and partners in a partnership must pay self-employment tax on the net income that passes through from the business. Self-employment tax equates to the employee and employer paid Social Security and Medicare taxes paid for and by employees of a business. With a dual class LLC, only the general members pay self-employment tax. Limited members are viewed as non-participating investors and do not have to pay this tax.

 LLC Operating Agreement

The operating agreement document of a new LLC spells out which members will be general and who will be classified as the limited members. The agreement will also detail the duties and investment amounts of the members in the different classes. Also included in the operating agreement will be how income and deductions will be split between the two classes of members. To avoid adverse tax consequences, care must be taken when defining the roles of the two types of members.

Here is a link to more legal stuff regarding an LLC in Nevada, if you care to read more about the structure of an LLC and how everyone is protected.

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