Multi-Member LLC [Definition, Pros and Cons]

Once you embark on a business venture, it’s essential to protect your business and personal assets. Unfortunately, some entrepreneurs make the mistake of intertwining business with private assets, which could result in personal bankruptcy if the company is ever sued.

Therefore, it’s wise to register as a single- or multi-member LLC (Limited Liability Company) to ensure a legal shield. But what is a multi-member LLC (MMLLC), and how does it compare to a single-member LLC?

What Is a Multi-Member LLC?

LLC stands for Limited Liability Company. Entrepreneurs decide to form an LLC because they provide the same limited liability as a corporation, without the same expense and complexity. In addition, forming an LLC is the simplest way to put a legal safety shield between personal assets and business assets if your business gets sued in the future.

General Partnership vs MMLLC

If you aren’t the only owner of a business, then, by default, you operate as a general partnership. In a general partnership, all owners agree to an unlimited liability agreement, which means that any partner within the general partnership can be sued for the business’s debts.

You should register as a multi-member LLC when you want personal protection for your and your partner’s assets. This will ensure that the owners (called members) are not liable for company debts or liabilities. An LLC business structure is permitted under state statutes, but regulations under the agreement differ from state to state. 

Member vs Manager-Managed

Members of an LLC can either run the business themselves or hire a manager on their behalf. Whether the manager is successful in running the business or not, members are still liable to pay tax on their percentage of the company’s profits. Depending on the setup of the company and the members’ experiences, they will decide whether a member or manager-managed agreement is more suitable.

Member Salaries and Ownership

By adding members to an LLC, there’s an option to divide profit and loss percentages among owners to the desired proportion. Members can’t receive compensation in the form of salaries or wages because they aren’t considered employees of their own company but rather members. Consequently, members have complete control over how to divide profits among each other. And since they aren’t considered shareholders, there’s no need for regular shareholder meetings.

As payment, members receive a distribution of the company’s profits. Then, depending on each member’s shares percentages, they will receive that percentage on payday. Multiple owners receive a share of the profits at the end of each month. Because this is a complex calculation (especially in an MMLLC), most companies in this business structure consult with the top LLC services for guidance.

How Do Multi-Member LLC Taxes Work?

Taxes significantly differ between corporations and LLCs. In corporations, profits are taxed at the corporate level. Then, after the corporate tax has been deducted, profits are distributed to individual shareholders, which will be taxed again—for investors, this double taxation isn’t very efficient.

Since LLCs aren’t taxable entities, they don’t have a separate tax classification under the Internal Revenue Service (IRS) and are automatically taxed as a partnership.  Members must pay taxes on their share of the profits and losses.

How to tax a multi-member LLC is quite different in that it’s directly passed through the investors or members. The LLC business entity doesn’t pay taxes, but members are responsible for reporting profits and losses on their own personal income tax. The list of forms members need to have when filing taxes include:

• Form 1040

All taxpayers have to fill out this form. In addition, members of an MMLLC should file Schedule E to report their share of profit or loss and Schedule SE for self-employment taxes.

• Form 1065

The business files this form for members of the LLC. It should include a Schedule K-1 document, which details all profits and losses of an individual member.

An LLC’s tax treatment and form types can differ from state to state. For example, Texas and California require LLCs to pay a special business tax (franchise or business excise tax). And Minnesota levies a partnership tax on partnership LLCs.

Members can also decide to be taxed as a C Corp or S corp:

• An MMLLC can be taxed as a C corp when filing Form 8832.
• An MMLLC can be taxed as an S corp when filing Form 2553.

Single–Member vs Multi-Member LLC

The US government permits US citizens, non-US citizens, non-resident aliens, and corporations or LLCs to form either a multi-member or single-member LLC. But such entities as insurance companies and banks are not permitted to form LLCs.

A single-member LLC has one owner (or member) who has 100% control over the company. The owner’s personal assets are separate from the business’ assets. This LLC is best for small businesses or businesses owned by spouses.

A multi-member LLC has multiple owners (two or more members) and shares control of the company. The LLC is its own legal entity separate from its members’ assets. Profits and losses are distributed among its members. This LLC is best for corporations with numerous investors and owners who are US citizens or non-US citizens.

Note differences between the two entities:

The primary advantage of single and multi-member LLCs is that you establish the business as a separate entity from its owner and LLC multiple owners.

Note the pros and cons of each:

Whether you have a multi-member or single-member LLC, there are advantages and drawbacks of each. Basically, an SMLLC is a sole-owned company and a MMLLC is a company owned by multiple members. But what if a married couple owns an LLC? 

Husband and Wife LLCs

Are a husband and wife a single-member or multi-member LLC? Rules of an MMLLC don’t always apply when two members are married. But depending on the state, two members can still be considered a single-member LLC when married. Dependent factors include:

• Where the LLC was formed.
• If the state is a non-community property—spouses should file as a partnership.
• If the state is a community property—husband and wife owners should file as a multi-member LLC with a spouse but be treated as an SMLLC for tax purposes.

States considered community property include Louisiana, Texas, California, Arizona, Idaho, New Mexico, Washington, Nevada, and Wisconsin. According to state rules, all property and assets acquired by a married individual are owned by both the individual and the individual’s spouse. (These laws are extended to companies in the same manner.)

Key Takeaways

Converting Single–Member LLC to Multi-Member LLC

When you wish to add members to an LLC, the LLC’s tax status will change from a disregarded entity (sole proprietorship) to a general partnership, unless the LLC is currently taxed as a C corp or S corp). Therefore, it’s essential to follow the procedure outlined by the state law or in your operating agreement.

Using a registered agent is usually the best way to do the conversion to ensure no stones are left unturned and all legal documentation has been filed.

Adding a Partner to an LLC

When single-member LLCs wish to expand, they usually add another member to their already-formed company, which is beneficial because it increases capital and workforce. But the conversion from a single-owner to a multi-member is a significant change that requires amendments to the operating agreement and taxation.

Adding a member to an LLC is straightforward:

• Follow the operating agreement and written consent to gain membership in the LLC. All the current sole owners can establish these terms if it hasn’t yet been established.
• It should be established in the operating agreement that a portion of the owner’s interest will be transferred to the new member.
• Create a section in the membership agreement that stipulates the role of the new member. Whether it’s solely for investment or collaboration, it’s essential to specify their role.

Once changes have been made to the agreement, it must go through all legal channels to ensure the company is registered as an MMLLC within the state. For example, when you add a member to an LLC and change from a single- to multi-member LLC, you must ensure that you file the required tax forms according to the new change.

Conclusion

Registering an MMLLC is highly beneficial because you can add an unlimited workforce to your company. In addition, principal members of a company can develop a membership agreement that stipulates each member’s role to ensure the company reaches its full potential.

The most significant benefit is that no member is liable if the company faces financial problems or business debts–ensuring that all members’ assets are safe, secure, and separate from the business.