IRS: Partners' Share of LLC Income Is Subject to Self-Employment Tax

This isn't really news. The general consensus among (properly trained) tax practitioners has long been that partners' distributive shares of the partnership income are self-employment income and thus are subject to the various self-employment taxes. What this CCA does is formally clarify the tax treatment of partners' income from an LLC taxed as a partnership.

Note that LLCs are regarded as partnerships for tax purposes. The fundamental misunderstanding addressed by the CCA is that LLC members were commonly but erroneously characterized as limited partners by many practitioners because of the "limited" nature of their legal liability for the entity's debts. However, properly-trained practitioners have long understood that for tax purposes, "limited partner" is generally defined by the limited scope of management and control they exert over the partnership.

Yet another reason to avoid choosing the partnership tax election for LLCs for organizing your startup.