Can a multi-member LLC with two S-Corps as members have the S-corps' owners be treated as employees?

This is a good tax planning question! The key factor here isn't actually the legal structure (LLC) but rather how the entity is classified for tax purposes. In your case, your LLC elected partnership taxation, so it's treated as a partnership for tax purposes regardless of the LLC wrapper. Because of this, the owners of the S-Corps (you and your partner) cannot be W-2 employees of the LLC. Partners in a partnership cannot be employees of that same partnership for federal tax purposes - they're considered self-employed. However, if you changed your LLC's tax classification to an S-Corporation (which is possible), then yes, you and your partner could potentially become W-2 employees of the LLC/S-Corp. You'd each need to take reasonable salaries based on your services, with the remainder of distributions as non-wage distributions. The legal entity structure of the member S-Corps (whether they're formed as LLCs electing S-Corp status or actual corporations electing S-Corp status) doesn't impact whether you can be employees of the parent LLC. What matters is how the parent LLC is classified for tax purposes.

Just wanted to share my experience with a similar situation. I was struggling to understand the complex tax implications of my multi-entity structure with my LLC and S-Corp setup. I found this tool called taxr.ai (https://taxr.ai) that helped me analyze my situation. It's designed specifically for business entity structures and tax classification questions. Their system analyzed my Articles of Organization, Operating Agreement, and tax election forms, then provided clear guidance on exactly how my business entities should be structured to achieve my goals while staying compliant. In my case, they confirmed that my LLC taxed as a partnership couldn't employ me directly, but helped me structure things through my S-Corp to legally minimize self-employment taxes. Might be worth checking out for your situation.

I actually tried taxr.ai after seeing it mentioned here. I was really impressed with how it handled my complex business structure questions. I uploaded my LLC operating agreement and S-Corp election documents, and it quickly identified that I had unintentionally created a situation where I was treating myself as both a partner and employee (which the IRS doesn't allow). The tool provided clear citations to IRS rulings (specifically Rev. Rul. 69-184) and laid out three different restructuring options with the pros and cons of each. I showed the results to my accountant, and she was impressed with the accuracy. We ended up implementing one of the suggested structures that's saving me about $12K annually in self-employment taxes while keeping me fully compliant. Definitely worth it for multi-entity situations like what the original poster is describing!

Just wanted to share what worked for me with a similar structure. After spending WEEKS trying to get through to the IRS for clarification on this exact issue, I found Claimyr (https://claimyr.com). They got me connected to an actual IRS representative in about 15 minutes instead of the usual hours-long wait. I had been trying to get an official answer on whether the owners of S-Corps that are members of an LLC can be treated as employees. The IRS agent walked me through the official position and confirmed what others have said - it depends on the tax classification of the LLC, not its legal structure. You can see how it works in this video: https://youtu.be/_kiP6q8DX5c The IRS agent was super helpful once I finally got through and even emailed me specific references to the relevant tax code sections. Saved me from potentially making a costly mistake with my business structure.

I have to apologize for my skeptical comment earlier. After struggling with my business tax issue for months, I broke down and tried Claimyr yesterday. I'm still in shock - I was connected to an IRS agent in about 20 minutes who actually resolved my issue! For my specific situation (S-Corp owned by an LLC), the agent confirmed that changing the tax classification of the parent entity would allow the structure I wanted. She cited specific sections of the tax code and even sent me follow-up documentation. I've spent MONTHS trying to get this answer. My accountant kept giving me vague responses because he couldn't get clarity from the IRS either. I wish I had known about this service months ago - would have saved me so much stress and potentially thousands in incorrect tax structuring.

A few important points about multi-member LLCs with S-Corps as members: 1. An LLC taxed as a partnership can't have the individuals as W-2 employees, but the S-Corps can have their owners as W-2 employees 2. If you convert the LLC to S-Corp status, you'll lose some flexibility in allocations and distributions that partnerships allow 3. When S-Corps are members of an LLC taxed as a partnership, the LLC income flows through to the S-Corps, then to the individual owners, avoiding self-employment tax at the individual level 4. The IRS watches these structures carefully for reasonable compensation issues I've had this exact structure for 5+ years. The key is making sure your operating agreement and conduct align with your tax classifications.

Has anyone looked into whether state tax laws might treat this differently? I know for federal purposes what everyone's saying about tax classification controlling is right, but I'm in California and they sometimes have their own weird rules about business entities.

This is a really complex area that trips up a lot of business owners! I've been dealing with similar multi-entity structures for years as a tax preparer, and I wanted to add a few practical considerations that might help. One thing that often gets overlooked is the administrative burden of maintaining multiple entities properly. You'll need separate bank accounts, separate books, formal resolutions for major decisions, and regular distributions documented properly. The IRS loves to challenge structures where the paperwork doesn't match the claimed entity separation. Also, consider the timing of distributions. If your LLC (taxed as partnership) makes distributions to the S-Corps, and then the S-Corps need to pay your salaries, you'll want to coordinate the cash flow carefully. I've seen situations where the S-Corp doesn't have enough cash to pay reasonable salaries because the LLC distributions weren't timed properly. One more thought - if you're considering converting the LLC to S-Corp status instead, remember that you'll lose the flexibility to make special allocations that partnerships allow. With an S-Corp, everything has to be pro-rata based on ownership percentages. I'd strongly recommend getting a second opinion from a CPA who specializes in multi-entity structures before making any changes. The tax savings can be significant, but the compliance requirements are real.