WHAT IS A DUAL CLASS LLC

The Dual Class LLC is a special type of LLC that follows proposed IRS regulations which allow an LLC to be deemed analogous to a limited partnership for Federal Income Tax purposes. The Dual Class LLC is structured to admit both active, management-providing members (“General Members”) in addition to more passive, capital-contributing members (“Limited Members”). In doing so, the members/owners acting solely as limited partners are not subject to the Self Employment (“SE”) tax.

Here’s how it works. The Spiegel & Utrera, P.A. Dual Class LLC is divided as follows:

Class A General Member Units: The smaller manager class receives a priority preferred return of income (for example, a management or sales fee arrangement) that is contingent on the profitability of the LLC. As such, it may not be a fixed compensation amount or it will constitute a guaranteed amount, which is prohibited.

Class B Limited Member Units: This portion of the LLC membership interests is the cash-contributing members’ interest and is structured as a non-manager class qualifying for limited partner status. This class receives a cumulative preferred-priority return of profits based on their unreturned capital contributions, whereas the smaller active manager class would not.

For example, assume a Dual Class LLC with three Members: Perry Manson and Samuel Adamson are Limited Members initially investing $50,000 each into the Dual Class LLC and Angela Dickeyson is the General Member and she is putting in “sweat equity” (future services) with an agreed-upon value of $50,000 over the course of two years. To the extent that Angela is providing services to the Dual Class LLC, she will be subject to the SE tax while Perry and Samuel will not be.

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