Members, Shareholders, and Individual Partners

Definition

Members own LLCs, shareholders own corporations, and partners own partnerships; each holds an equity interest whose rights are set by state law and the entity's governing documents. For federal income tax, a multi-member LLC is treated as a partnership by default^[4], partners are taxed on their shares of partnership income rather than the partnership being taxed^[1], and shareholders of a domestic corporation are taxed on dividends, which can be qualified dividend income taxed at capital gain rates.^[3]

Federal law

Formed under state law. No Act of Congress creates it; the federal laws below apply to it as described.

1. Internal Revenue Code of 1954, Pub. L. 83-591, ch. 736, § 701, 68A Stat. 3, 239. Internal Revenue Code § 701: partners, not the partnership, are subject to income tax. Official text: govinfo.gov, U.S. Government Publishing Office.
2. Internal Revenue Code of 1954, Pub. L. 83-591, ch. 736, § 761, 68A Stat. 3, 252. Internal Revenue Code § 761(b): 'partner' means a member of a partnership. Official text: govinfo.gov, U.S. Government Publishing Office.
3. Jobs and Growth Tax Relief Reconciliation Act of 2003, Pub. L. 108-27, § 302, 117 Stat. 760. Created qualified dividend income (26 U.S.C. § 1(h)(11)) for dividends received by individual shareholders. Official text: govinfo.gov, U.S. Government Publishing Office.

Federal regulations

Rules issued by federal agencies under the laws above.

4. Classification of certain business entities, 26 CFR 301.7701-3 (Internal Revenue Service (Department of the Treasury)). Treasury entity classification: default partnership treatment for a domestic eligible entity with two or more members; single-member entities are disregarded unless they elect. Official text: govinfo.gov, U.S. Government Publishing Office.