Okay, this is one of those "nested dolls" kind of question...The PPC guide refers to IRC Sec. 1402 and Prop Reg 1.1402(a)-2 with respect to application of the SE tax rules. Those sections deal with definitions, and 1.1402(a)-2 refers you to Treas. Reg. §301.7701-3 "Classification of certain business entities"§301.7701-3(b)(2)(ii) - Definition of limited liability.For purposes of paragraph (b)(2)(i) of this section, a member of a foreign eligible entity has limited liability if the member has no personal liability for the debts of or claims against the entity by reason of being a member. This determination is based solely on the statute or law pursuant to which the entity is organized, except that if the underlying statute or law allows the entity to specify in its organizational documents whether the members will have limited liability, the organizational documents may also be relevant. For purposes of this section, a member has personal liability if the creditors of the entity may seek satisfaction of all or any portion of the debts or claims against the entity from the member as such. A member has personal liability for purposes of this paragraph even if the member makes an agreement under which another person (whether or not a member of the entity) assumes such liability or agrees to indemnify that member for any such liability..............With that in mind, a member would have personal liability for their own negligence but not for the negligence of other members. Also, if a general partnership is re-organized as an LLC, the members are still liable for any debts of the general partnership that they were liable for before the re-organization. (So I guess in the latter case earnings would be SE income just like in a partnership until all the pre-existing liabilities were satisfied.)I think to a certain extent it is a matter of the various laws not "in sync". LLCs are a fairly new animal, and tax law previously was constructed to address the situation of partnerships and the difference between general and limited partners.Now the LLC comes along and application of prior law makes for an incongruous result. I don't imagine much will change until the application of these provisions results in unfair expense to many people and a hue and cry goes up to modify the law.I also don't think that, realistically, this provision applies to many LLCs.I don't know if that clarified much...Gail~But today it seems attorneys are sold hook line and sinker on LLC's and there is nothing you can show them to get them to understand the tax consequences.Yep, that is exactly how it seems - they are out there selling all the bells and whistles to anyone who will stop to listen.
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