Schedule K 1065 Line 14a LLC Vs. General Partner question

[mvp2885]

Practicing 1065s at the moment (these are scenarios). Question is; I have a partnership (2 individuals 50% each) who registered as an LLC with their state. I am filing out the K-1 worksheet for each partner on proseries and it asks if they are General or limited.  If I click limited, page 4 schedule K does not calculate SE tax on line 14a, but if I click General, then it does. My question is, if they formed an LLC as a partnership, are considered members or partners? Because if they are members, they are avoiding SE tax which doesn't make sense. I mean, I can manually enter the amounts on 14a on their own k-1, not the 1065 schedule K, and im wondering if that is the work around? Or how should I go about doing this? Please help. 

[taxiowa · Accepted solution]

There is a vague understanding that a partner will be classified as a general partner if the partner can:

1.  Bind the partnership to an agrement or have the authority to enter a contract on behalf of the partnership.

2.  Has personal liability for debts or obligations of partnership because he is a partner.

3.  Works over 500 hours per year.

But as is always the case, facts and circumstances determine whether a partner does in fact materially participate.  Personally I have always felt at least 1 LLC member should be judged as general, and I have often had more than that.  For instance in farm LLC partnerships where 2 brothers work the farm but both wives work in town, maybe only the 2 boys are general with wives being passive.