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Author Topic: Exclusion of managing members when LLC shares are held by non-working members  (Read 6107 times)
 
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NickDin
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« on: November 01, 2013, 02:45:47 PM »

If an LLC has one managing members and and has non-working members that are investors in the LLC, can the managing member be excluded?

We are arguing this point with an underwriter who feels that the managing member cannot be excluded as some of the members are non-working.  We pointed to Labor Code section 3351(f), but the underwriter is sticking to his guns on including the managing member.

Any input would be appreciated.
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beancounter
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« Reply #1 on: November 16, 2013, 09:42:19 AM »

In CA, only manager members can be excluded by endorsement per Labor Code section 3351(f).  LLC members who are not managers cannot be excluded by endorsement.
Quote
   (f) All working members of a partnership or limited liability
company receiving wages irrespective of profits from the partnership
or limited liability company; provided that where the working members
of the
partnership or limited liability company are general partners
or managers, the partnership or limited liability company and the
partners or managers shall come under the compensation provisions of
this division only by election
as provided in subdivision (a) of
Section 4151. If a private corporation is a general partner or
manager, "working members of a partnership or limited liability
company" shall include the corporation and the officers and directors
of the corporation, provided that the officers and directors are the
sole shareholders of the corporation. If a limited liability company
is a partner or member, "working members of the partnership or
limited liability company" shall include the managers of the limited
liability company.

Many times, LLC members are inactive and not paid so they will not be included on the audit...but they cannot be added to the exclusion endorsement.  Managers and members are identified in the Articles of Organization.

An LLC with both manager members and members who are not managers can still exclude manager members...it is not similar to a corporation in that respect.  This is because the Labor Code governs who can be excluded (the USRP only governs the classification and minimum/maximum payroll limitations for those who are included).  The Labor Code requires a corporation to be closely-held for officers/directors to be excluded:
Quote
3351(c) All officers and members of boards of directors of
quasi-public or private corporations while rendering actual service
for the corporations for pay; provided that, where the officers and
directors of the private corporation are the sole shareholders
thereof, the corporation and the officers and directors shall come
under the compensation provisions of this division only by election

as provided in subdivision (a) of Section 4151.

Labor Code section 3351(f) does not have a similar requirement for partnerships or LLC's.

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Exclusion of Officers, Members of LLC, General Partners, etc.
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Why only LLC Managing Members can be excluded
.  I have more information regarding "closely held" or "close corporation"...I'll post it tomorrow.
I hope this helps Smiley
« Last Edit: November 20, 2013, 12:23:37 AM by beancounter » Logged

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« Reply #2 on: November 20, 2013, 04:29:18 PM »

I have more information regarding "closely held" or "close corporation"...I'll post it tomorrow.

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NickDin
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« Reply #3 on: November 24, 2014, 02:32:42 PM »

Beancounter,

Thanks for the info on LLC's.

Here is another situation that just came up.

We have a surgery center with two managing members that are excluded.  They also have four partners/members with minority ownership that are not managers and use the center to perform surgeries.  These members are not on payroll and are paid a dividend.

Would these individuals be included at audit?  If so, would their remuneration be based on the min/max or would it be based on the dividend?

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auditor1
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« Reply #4 on: December 01, 2014, 10:24:12 AM »

As previously discussed, Members who are not Managers cannot be excluded from the audit unless they are inactive and unpaid (only Manager Members can be excluded by endorsement).  In the case you're describing, they are both active and paid (albeit, not via payroll).  Active and/or paid members would be included subject to the minimum/maximum payroll limitations in the USRP.

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LegalZoom
:

Quote
When you create or join a limited liability company, you have a claim on all earnings and assets of the business.  Limited liability company members do not receive dividend payments; only shareholders of a corporation receive earnings through dividends.  However, members may receive distributions of profit from the LLC at the discretion of management or as required in an operating agreement.

The LLC is responsible for filing an informational tax return each year; however, members must receive a Schedule K-1 which reports their proportionate share of income tax items.  The members must then report all K-1 amounts on the applicable IRS Form 1040.  The members incur a tax liability when the LLC earns a profit, irrespective of whether it distributes or retains it.  In contrast, corporation shareholders pay additional income tax only on dividends they receive during the tax year.  If the corporation does not declare a dividend, shareholders do not incur a tax liability.


Let us know if this helps :-)
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