Who's the Employer?

Answer: 5% exactly. I'll explain, including references to my book, Who's the Employer?. (Subscribers can click to view online the text of references to sections in the book.)

LLCs with multiple owners are taxed as partnerships or as corporations. The default is that they are taxed as partnerships. (See WTE 1:07.) You have not indicated how this LLC is taxed. I assume it is taxed as a partnership.

Each partner (or LLC member) is deemed to own his or her pro rata interest of whatever the partnership owns. (See WTE 14:09.) As such, the employee in your question owns 50% X 10% of the corporation, or 5%. His ownership is insufficient to make him an HCE or a key employee, although his compensation may do so. See IRC 414(q)(2), 416(i)(1)(B)(i)(I).

Although the reasoning would be different, on these facts the result would be the same if the LLC were taxed as a corporation. (See WTE 14:12.) This is pursuant to the IRC 318 attribution rules, which determine ownership for purposes of traditional HCEs, key employees, HCEs, and required minimum distributions. A different attribution system applies to determine ownership for purposes of the controlled group rules, but, again, it would reach the same result. (See WTE 07:10.)

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