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Federal tax classification of entities with zero-equity members.

Publication: The Tax Adviser
Publication Date: 01-MAY-02 		Format: Online - approximately 1060 words
Delivery: Immediate Online Access

Article Excerpt
Zero-equity members are not uncommon, especially in a foreign context. In fact, countless German businesses operate through an entity called a GmbH & Co KG. A U.S. acquirer of a German group is likely to end up owning several GmbH & Co KGs and needs to know how to classify them for U.S. tax purposes.

In Letter Ruling 200201024, one "member" of a two-member domestic limited liability company (LLC) did not meet the minimum membership requirements for the "check-the-box" rules under Regs. Sec. 301.7701-3. The member had no interest in the LLC's capital, did not share in the company's profits or losses and had no management rights or responsibilities. Its sole purpose was to prevent the other member from placing the LLC into bankruptcy on its own volition. As a result, for classification purposes, the LLC was a disregarded entity or "tax nothing" under the default rule for domestic entities under Regs. Sec. 301.7701-3(b)(1). According to this regulation,...

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