partnership
This is a common source of confusion, as the distinction between an owner's compensation and an employee's wages is fundamental to partnership tax law and liability.
Here is a clear explanation of both points, maintaining the context of your LLC taxed as a partnership.
1. Active Partner and Hourly Wages
In an LLC taxed as a partnership (a Multi-Member LLC that files IRS Form 1065), an "active partner" (or actively managing Member) generally does not have a right to hourly wages, specifically because they are not legally an employee of the partnership.
Compensation Structure
- Tax Status: For federal tax purposes, a partner cannot be an employee of the partnership. The IRS position is clear (Rev. Rul. 69-184) that a partner is considered a self-employed owner.
- Wages (W-2): An active partner does not receive W-2 wages, is not subject to standard income tax withholding, and is not covered by the Fair Labor Standards Act (FLSA) for their services rendered as a partner.
- Guaranteed Payments (K-1): An active partner's compensation for the services they render to the firm (e.g., managing the digital marketing studio) is instead structured as Guaranteed Payments. This income is reported on the partner's Schedule K-1 and is subject to self-employment tax (which includes both the employer and employee portions of FICA/Medicare).
In short, your compensation as an active partner is determined by your LLC's Operating Agreement (draws and guaranteed payments), not by federal or state hourly wage laws.
2. Clarifying the "Joint Employer" Situation
The "Joint Employer" doctrine is the legal mechanism that allows a court to pierce the limited liability veil to hold an individual owner personally responsible for the company's wage violations against its employees.
The doctrine operates by broadly interpreting the term "employer" under the FLSA.
The Mechanism of Personal Liability
The most relevant type of joint employment here is the Vertical Joint Employment (or individual liability) scenario, which follows the "Economic Reality Test."
The court essentially looks at the individual—your supermajority founder, a "Partner," or a "Managing Member"—and asks: Is this person functionally acting as the employer?
The test is typically satisfied if the individual has the power to do four things related to the employee's work:
| Factor | Functional Control | Liability Implication |
|---|---|---|
| Hire/Fire | Possesses the authority to hire, fire, or make decisions on promotions/layoffs. | High |
| Supervise | Controls the employee's work schedules and conditions of employment. | High |
| Determine Pay | Determines the employee's rate or method of payment (e.g., setting salaries or hourly rates, signing checks). | High |
| Maintain Records | Maintains the official employment records, such as payroll and time sheets. | Moderate |
How it Bypasses the LLC Veil
- Limited Liability Protection: The LLC protects the passive owners (Passive Members) from the business's debts and liabilities.
- FLSA's Broad Scope: The FLSA is a remedial statute—meaning its purpose is to protect workers—so courts interpret it broadly.
- Joint Employer Finding: When a court finds that an Active Partner or manager meets the "Economic Reality Test" factors above, that individual is deemed an "Employer" under the FLSA in addition to the LLC entity.
- Result: Both the LLC (the company) and the Active Partner (the individual) are held jointly and severally liable for the full amount of back wages, damages, and attorney fees. The personal limited liability veil is essentially bypassed because the court views the individual's actions as creating a direct employment relationship with the employee.
Therefore, the liability is attached not to their status as a "Partner," but to their functional control over the daily employment operations of your agile tech firm.