Dual class limited members cannot vote on everyday operational matters.
Limited liability companies are business structures legally distinct from their owners. To form an LLC, you file articles of organization with your secretary of state. LLC owners are called members. A dual LLC refers to a dual class LLC, which is a proposed Internal Revenue Service designation for a business that organizes as a multi-member LLC then defaults to tax treatment as a partnership.
Dual Class LLC
A dual class LLC is a special LLC that is classified as a limited partnership for tax purposes by the IRS. Instead of only one type of membership, or ownership, interest, if you operate a dual class LLC, your LLC has two types. Your dual class LLC’s general members function akin to a limited partnership whose general partners are open to full liability and actively run and manage the business. Limited partners contribute capital but play a passive role with no or little participation in management, and a dual class LLC’s limited members do the same.
A dual class LLC got its name because it offers two classes of membership interests. A dual class allows members of LLCs who default to tax treatment as a general partnership to avoid self-employment taxes. Under this proposed IRS rule, your LLC’s general members are subject to self employment taxes but its limited partners are not. Instead, your LLC’s non-managing members enjoy taxation similar to that of S corporation shareholders.
Congress never finalized this IRS rule therefore the dual class LLC rule is not in effect. The IRS’ general stance is if taxpayers comply with the most recent proposed rules, limited members will avoid IRS difficulties regarding any self-employment tax avoidance. Without a finalized rule, the IRS ultimately determines who is or is not considered a passive member from a tax perspective. Therefore, if you are an LLC member with elimination of self-employment taxes as your goal, consider consulting with an experienced LLC business service specialist and CPA to properly structure your dual class LLC.
Snake River Homes, LLC is a newly formed residential development firm with five members that chooses to operate as a dual class LLC. Two members are managing members, active in running the business. The other three members are passive members who simply contributed money to the LLC for investment purposes. The operating agreement that clearly designates two class levels, general and limited, and defines the responsibilities and rules governing each. The two general members contribute $20,000 each and agree to provide services worth $60,000 the first year. The three limited members contribute $80,000 in cash. The two general members will be subject to self-employment tax because of their involvement in the business but the three limited partners would not.