A limited liability company (LLC) is a special type of business structure that falls somewhere between a partnership and a corporation. It can be taxed on a pass-through basis, meaning that the business itself does not pay tax, and the profits are taxed as the personal income of the owners. The structure can also offer limited liability, meaning owners cannot be held personally responsible for the company's debts. The owners of an LLC are formally known as members of the company.
A dual-class LLC is one set up so that there are two classes of members. These can be known under several names such as Class A & Class B, general and limited, or active and passive. Generally the difference is that one class of members contributes money while the other contributes time or expertise. Usually the people in the latter class run the business from day to day.
The IRS does not formally recognize the LLC structure, but allows the business to decide whether to be treated as a partnership or a corporation for tax purposes. The main tax effect of being a dual-class LLC rather than one with a single class of members involves self-employment tax. Staffers who have put money into the business are generally not eligible to pay self-employment taxes. Those who have put no money into the business and instead contribute time and effort are generally eligible to pay self-employment taxes. The final decision about which individuals are and are not eligible for self-employment tax remains in the hands of the IRS.
Another important aspect of a dual-class LLC is that a member who has not put money into the company and instead contributes time and effort cannot be paid a fixed amount of compensation. His compensation must be based on the profitability of the company.
The term "dual LLC" should not be misinterpreted as referring to another type of business structure, the limited-liability limited partnership. This is a form of partnership that offers two types of protection to its members. First, it offers all members the limited personal liability for debts that exist in an LLC. This contrasts with a limited partnership, where this can only be enjoyed by some and not all partners. Second, a limited-liability limited partnership offers professional limited liability, meaning one partner cannot be held responsible for the professional actions of another in carrying out the services of a business. This could, for example, involve a partner giving poor advice to a client or carrying out medical malpractice. As with an LLC, a limited-liability limited partnership is a structure recognized by individual states and thus is not available nationwide.