Taxation Based On Type of Partnership
In the absence of an election to the contrary, multi-member limited liability companies (LLCs), limited liability partnerships (LLPs) and certain multi-member trusts are treated as partnerships for United States federal income tax purposes. Certain non-U.S. entities may also be eligible for treatment as partnerships. Individual states of the United States do not universally accord "flow-through" taxation to partnerships, and some distinguish among different kinds of entities that are treated the same under federal tax principles (e.g. Texas taxes LLCs as corporations, while according flow-through treatment to partnerships). Local jurisdictions may also impose their own taxes on entities taxed as partnerships at the federal level (e.g., New York City unincorporated business tax).
Certain threshold issues bear mentioning here: (1) members of an LLC, or partners in a partnership which has elected to be treated as a partnership for Federal income tax purposes, may use a proportionate share of the partnership debt in order to increase their "basis" for the purpose of receiving distributions of both profits and losses; (2) members and/or partners must be "at risk" pursuant to; and (3) they must actively participate pursuant to.
There is little published authority on these matters. On the issue of material participation in LLCs there are only the Gregg (U.S.D.C. Oregon 2000) and Assaf cases. These cases generally seem to agree that the least onerous test for qualifying for material participation for an LLC member is the same as that for a General Partner in a Limited Partnership, or 100 hours annually.
Read more about this topic: Partnership Taxation In The United States
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