Does the $50-per-member annual LLC filing fee under Tax Law § 658(c)(3) apply to investors who hold only a non-voting contractual economic interest in a portion of a member's interest, rather than actual LLC membership?

Plain-English summary

1350 Broadway Associates, a New York general partnership formed in 1965 with two 50-percent Partners, planned to convert to a limited liability company. Over the years, other investors ("Participants") had acquired fractional contractual interests in a portion of each Partner's economic interest through a "Participating Contract." Petitioner asked whether these Participants would count as "members" for purposes of the $50-per-member annual LLC filing fee under Tax Law § 658(c)(3).

The Participants had no right to vote on partnership matters, no right to receive distributions directly from the partnership (each Partner, as agent, received distributions and passed along a share under the Participating Contract), and no authority to bind or act for the partnership. Upon conversion to an LLC, only the two Partners would become LLC members; the Participants would not be admitted as members, would not vote, would not receive distributions from the LLC directly, and would not be parties to the LLC operating agreement.

The Department of Taxation and Finance treated the Partner-Participant arrangement as an assignment of a membership interest under Limited Liability Company Law § 603. Because the Participants would never be admitted as members under LLC Law §§ 102(q), 602, and 604 - and would never sign the operating agreement - they did not qualify as "members" for filing-fee purposes. The Department concluded that only the two Partners would be LLC members, so the annual filing fee under Tax Law § 658(c)(3) would be based on two members, resulting in the statutory minimum fee of $325.

What this means for you

LLCs converting from partnerships with passive investors

If your partnership has silent investors who hold only a contractual, assigned economic interest - no vote, no distribution rights directly against the entity, no signature on the operating agreement - converting to an LLC does not automatically turn those investors into "members" for tax purposes. The Tax Law § 658(c)(3) filing fee is keyed to the count of actual LLC members (or partners), determined under Limited Liability Company Law's admission and assignment rules, not to everyone with an economic stake in the business.

Structuring participating contracts and operating agreements

Keeping participants out of the operating agreement, denying them a vote, and never formally admitting them as members (per LLC Law §§ 602 and 604) is what kept them outside the fee calculation here. If participants were instead admitted as members or made parties to the operating agreement, the analysis - and the fee - would change.

Common questions

Q: Does every investor with an economic interest in an LLC count as a "member" for the annual filing fee?
A: No. Under Limited Liability Company Law § 102(q), a "member" is someone admitted as a member under the LLC's operating agreement and the LLC Law. An investor who only holds an assigned economic interest, without admission and without being party to the operating agreement, is not a member.

Q: How was the Partner-Participant relationship characterized here?
A: The Department treated each Partner's agreement with its Participants as an assignment of a membership interest under Limited Liability Company Law § 603(a), which by default only entitles the assignee to distributions - not to participate in management or to become a member.

Q: What determined the size of the annual filing fee in this case?
A: Tax Law § 658(c)(3) sets the fee at $50 times the number of members (or partners), subject to a $325 minimum and $10,000 maximum. Because only the two Partners would become LLC members, the fee was the $325 statutory minimum.

Q: Could the outcome differ if the Participants were later admitted as members?
A: Yes. Under Limited Liability Company Law § 604(a), an assignee cannot become a member without the vote or written consent of at least a majority in interest of the members (unless the operating agreement says otherwise). If that consent were given and the Participants were admitted, they would count as members and the fee calculation would change accordingly.

Citations and references

• Tax Law § 658(c)(3) - sets the annual LLC/LLP filing fee at $50 per member/partner, with a $325 minimum and $10,000 maximum
• Limited Liability Company Law § 102(q) - defines "member" as a person admitted as a member under the LLC Law and the operating agreement
• Limited Liability Company Law § 503 - profits and losses are allocated among members as the operating agreement provides
• Limited Liability Company Law § 602 - governs when and how a person becomes a member
• Limited Liability Company Law § 603(a) - an assignment of a membership interest, absent contrary operating-agreement terms, entitles the assignee only to distributions/allocations, not membership rights
• Limited Liability Company Law § 604(a) - an assignee may not become a member without majority-in-interest member consent, unless the operating agreement provides otherwise

Source

• Landing page: https://www.tax.ny.gov/pubs_and_bulls/advisory_opinions/income_ao_2002.htm
• Opinion: https://www.tax.ny.gov/pdf/advisory_opinions/income/a02_3i.pdf

Original ruling text

New York State Department of Taxation and Finance

Office of Tax Policy Analysis
Technical Services Division

TSB-A-02(3)I
Income Tax
July 24, 2002

STATE OF NEW YORK
COMMISSIONER OF TAXATION AND FINANCE
ADVISORY OPINION

PETITION NO. I010920A

On September 20, 2001, a Petition for Advisory Opinion was received from 1350 Broadway
Associates, c/o Wien & Malkin LLP, 60 East 42nd Street, NY, NY 10165.
The issue raised by Petitioner, 1350 Broadway Associates, is whether the annual filing fee
of fifty dollars per member imposed on a limited liability company (“LLC”) pursuant to section
658(c)(3) of the Tax Law applies to investors who own a contractual non-voting economic interest
in a portion of a member’s interest.
Petitioner submits the following facts as the basis for this Advisory Opinion.
Petitioner, a New York general partnership organized in 1965, desires to convert to an LLC.
Petitioner consists of two partners, each with a 50 percent interest (the “Partners”). Other investors
(“Participants”) have acquired fractional contractual interests in a portion of the economic interest
owned by each of the Partners through a Participating Contract. Petitioner states that these
Participants are not partners. The Participants do not have a right to receive distributions from
Petitioner, do not have the authority to vote in partnership matters, and do not have any power or
authority to bind or act for Petitioner for any purpose.
Under a Participating Contract, each Partner acts as an agent for its Participants on the basis
that the Partner has the sole right under the Partnership Agreement to receive distributions, to vote
on all partnership matters, to exercise all legal rights of a Partner, and to conduct all partnership
business and administration. Separately, each Partner has agreed with its Participants that, for
certain major decisions, like the sale of partnership property, the Partner will vote only after a
specified level of approval (majority or otherwise) is obtained from its Participants.
Upon conversion of Petitioner to an LLC, only each Partner will become an LLC member
and will continue to have the same rights and obligations in relation to the LLC as the Partner had
in Petitioner. The Participants will have no right to vote in LLC matters, have no right to receive
distributions from the LLC, have no right to participate in the management of the LLC, will not be
admitted as a member of the LLC, and will not be party to the LLC operating agreement.
Applicable Law
Section 658(c)(3) of Article 22 of the Tax Law provides:
Filing fees. Every subchapter K limited liability company, and every limited
liability partnership under article eight-B of the partnership law and every foreign

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limited liability partnership, which has any income derived from New York sources,
determined in accordance with the applicable rules of section six hundred thirty-one
as in the case of a nonresident individual, shall, at the prescribed time for making the
return required under paragraph one of this subsection, make a payment of a filing
fee. The amount of the filing fee shall be the product of (a) fifty dollars and (b) the
number of members of such company or number of partners of such partnership, as
the case may be, as of the last day of the taxable year, but in no event shall such fee
be less than three hundred twenty-five dollars nor more than ten thousand dollars....
Section 102 (q) of the Limited Liability Company Law defines a “member” as:
a person who has been admitted as a member of a limited liability company
in accordance with the terms and provisions of [the Limited Liability Company Law]
and the operating agreement and has a membership interest in a limited liability
company with the rights, obligations, preferences and limitations specified under [the
Limited Liability Company Law] and the operating agreement.
Section 503 of the Limited Liability Company Law provides, in part:
The profits and losses of a limited liability company shall be allocated among
the members, and among the classes of members, if any, in the manner provided in
the operating agreement....
Section 602 of the Limited Liability Company Law provides, in part:
(a) A person becomes a member of a limited liability company on the later
of:
(1) the effective date of the initial articles of organization; or
(2) the date as of which the person becomes a member pursuant to [section
602] or the operating agreement; provided, however, that if such date is not
ascertainable, the date stated in the records of the limited liability company.
(b) After the effective date of a limited liability company’s initial articles of
organization, a person may be admitted as a member:
(1) in the case of a person acquiring a membership interest directly
from the limited liability company, upon compliance with the operating
agreement or, if the operating agreement does not so provide, upon the vote
or written consent of a majority in interest of the members;

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(2) in the case of an assignee of a membership interest of a member
who has the power, as provided in the operating agreement, to grant the
assignee the right to become a member, upon the exercise of that power and
compliance with any conditions limiting the grant or exercise of the power....
Section 603(a) of the Limited Liability Company Law provides, in part:
Except as provided in the operating agreement,
(1) a membership interest is assignable in whole or in part;
(2) an assignment of a membership interest does not dissolve a limited
liability company or entitle the assignee to participate in the management and affairs
of the limited liability company or to become or to exercise any rights or powers of
a member;
(3) the only effect of an assignment of a membership interest is to entitle the
assignee to receive, to the extent assigned, the distributions and allocations of profits
and losses to which the assignor would be entitled....
Section 604(a) of the Limited Liability Company Law provides, in part:
Except as provided in the operating agreement, an assignee of a membership
interest may not become a member without the vote or written consent of at least a
majority in interest of the members....
Opinion
In this case, the Partnership, 1350 Broadway Associates, consists of two Partners, each with
a 50 percent interest in the Partnership. Each Partner has a contractual agreement (a Participating
Contract) with Participants whereby the Participants acquire a portion of the Partner’s economic
interest in the Partnership. It is assumed, for purposes of this advisory opinion, that the agreement
between a Partner and the applicable Participant will be treated as an assignment of a membership
interest under section 603 of the Limited Liability Company Law. The Participants will not at any
time be parties to the LLC operating agreement or be admitted as members of the LLC. Therefore,
pursuant to sections 102(q) and 604 of the Limited Liability Company Law, upon conversion to an
LLC, only the two Partners of the Partnership will become LLC members.
Accordingly, for purposes of section 658(c)(3) of the Tax Law, the Participants will not be
considered members of the LLC. Therefore, the annual filing fee shall be imposed only with respect
to the two existing Partners in the Partnership who will become the LLC members. Pursuant to

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section 658(c)(3) of the Tax Law, the minimum annual filing fee of $325 would be imposed on the
LLC.

DATED: July 24, 2002

NOTE:

/s/
Jonathan Pessen
Tax Regulations Specialist IV
Technical Services Division

The opinions expressed in Advisory Opinions are
limited to the facts set forth therein.