Legal Question in Business Law in California

Re: Becoming an inactive member in a LLC

A problem here is that 17-year-olds don't have full pwers to make enforceable contracts, unless emancipated, and even then many businesses, agencies and institutions might be reluctant to do business with a minor.

I think I see your issue here. The IRS allows LLCs to be taxed as partnerships in some cases, or as corporations, at the LLC's election. However, a single-member LLC cannot elect to be taxed as a partnership. Therefore, the person in control of the LLC wants to bring you in as a 1% owner of the LLC so it qualifies for partnership tax treatment.

I'm afraid this is a proposition that I cannot recommend without doing paid research. On its surface, it seems to have too great an aura of illegal tax dodge, alhough it may be perfectly legal and legit. I just don't know. The most obvious problem is whether you would be treated by the IRS as a real member, or a sham, and the possibility of the latter if you didn't contribute capital, participate in voting, be recognized as having the rights of a full member under the terms of the operating agreement (and LLC filings with the Secretary of State), etc. etc.

Whether participating on this basis in the LLC would have any effect on your getting financial aid or grants may depend more on whether this scheme is legal or not than on whether you are a member of an LLC. Generally, people who decide on scholarships, grants, financial aid, etc. to students would be favorably impressed by the student's bona fide participation is starting and running suitable small-business ventures, but being investigated or penalized for participating in a tax dodge might be two strikes against favorable consideration.

All in all, I'd suggest telling the LLC promoter to look elsewhere.