LLC has two partners, 95% me, 5% my brother (he has negative capital). Involved in Okla real estate developement last 5 yrs but brother does all work/management, I live out of state. From last profitable year in 98 I paid S.E. tax on my K-1 share of profit, per my tax preparer. 2001 will be profitable but since I am not involved in operation, am I obligated to pay S.E. tax? Instead, could LLC distribute it's profit as non-S.E. dividend to me?
There's not enough info to give an answer about SE tax. Assuming the LLC is taxed as a partnership, is the LLC a manager-managed LLC or a member-managed LLC? Even if your brother does all the work, if it's a member-managed LLC, you're still a manager if you're a member. Like a general partnership.If it's a manager-managed LLC and you're not a manager, do you work more than 500 hours/year in the business? Sounds like you don't.If the answer to Question 1 is that it's manager-managed and the answer to Question 2 is that you don't work more than 500 hours per year in the business, then you're probably not SE-taxable on your distributive share of LLC income and your brother probably is SE-taxable on all of his distributive share of LLC income - in other words, you're treated like a limited partner for SE tax purposes. The fact that your brother has a negative capital account could (depending on how the operating agreement is drafted) cause the IRS to reallocate income, credits, losses, and deductions in a way that you might not expect. I hope there's an experienced accountant advising the LLC.
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