The Power of Partnership: Unleashing The Potential of A Multi Member LLC
By Bazal Razzaq
Updated: June 28, 2023
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- What is an LLC?
- How to change your LLC name in 2023?
- How to set up an LLC as a Non-US resident
- What Is A Foreign LLC?
- Mastering the Art of Maintenance: Things To Do After Setting Up An LLC
- Exploring the Basics: What is a Single Member LLC?
- C Corp vs LLC – Which Business Structure is Right for You?
- Which is the best state to form an LLC in?
- Unlocking the Benefits of an LLC (Limited Liability Company)
- A Guide to Business License: Everything you need to know
- Operating Agreement 101: A Key To A Successful LLC
- One LLC, Multiple Streams of Income: can you have multiple businesses under one LLC?
- Articles of Organization Made Easy: Everything You Need to Know
- What Is A LLC Annual Report: A Comprehensive Guide for Business Owners
- Exploring Eligibility: Who Can Be LLC Members?
- What Is A Domestic Limited Liability Company?
- What is An EIN, and Do You Need One?
- What Is a Registered Agent, and Why Does Your Business Need One?
- What is a Series LLC?
- How to start a business with no money in 6 steps
- Member Managed vs Manager Managed LLC – Which Structure Fits Your Business?
Looking to form a Multi Member LLC? Well, you’re exactly at the right place! We praise ourselves as your LLC guide and a well-wisher, and plan to be with you every step of the way in your LLC journey! So allow us, and let’s get straight into it!
What is a Multi Member LLC?
As the name suggests, a Multi Member LLC(MMLLC) is a Limited Liability Company with two or more members/owners. Like a typical LLC, an MMLLC offers its members/owners limited liability. If the company ever faces losses, debts, lawsuits, or litigations, the members’ private assets, like their car, home, and bank account, won’t be at risk. Claimants or collectors can seize only the LLC’s assets, not the owners.
Much like a single member LLC, the MMLLC provides the flexibility of a partnership with the limited liability of a corporation.
The formation of an MMLLC can take place under the following situations:
- Group/pair of friends starting a business together.
- Similarly, married couples start a business together.
- A company has multiple owners/members.
- Individuals sharing the same property getting into business
- Family-owned businesses.
Like an LLC, any person-whether a US citizen/resident or not, can set up an MMLLC. You can form an MMLLC in any US state. However, the laws and requirements may or may not change accordingly.
How to Form a Multi Member LLC?
Forming a multi member LLC can often feel like a confusing process. Is it the same as opening a single member LLC? Can having different owners/members complicate things a bit?
Rest easy. Here are six basic steps you need to follow, and voila! You already have a multi member LLC.
- Pick an LLC name: Yep. The very first step of forming an LLC is choosing an interesting name. Chances are you’ve already shortlisted a few names for your LLC. Now you just have to narrow it down to one.
With an LLC, there are some things you need to keep in mind:
- The name shouldn’t be the same as any other registered LLC.
- Avoid misleading the public by including any detail that displays your business as a bank, corporation, or any other formal entity it’s not.
- There are no restrictive terms such as “trustee,” “board,” “or insurance.”
- Your LLC name shouldn’t contain any obscene or forbidden words.
- Check that it’s not being used as a domain name to avoid trademark or legal issues.
- The name should reflect its LLC status. It should end with abbreviations like “LLC,” “LLC,” or “Ltd.” (Most people stick with just LLC)
- File Articles of Organization: To legally register your LLC, you should file Articles of Organization with your particular state. Also known as the Certificate of Formation establishes your LLC, and the information you need to provide depends on your particular state. Although, it contains the following:
- LLC name and address.
- The main purpose of your LLC.
- The number of shares authorized.
- The names and addresses of its members/owners.
- Registered agent’s name and address.
- The management structure of your LLC.
- Signature of the person forming the LLC.
- Hire a Registered Agent: Each LLC in America needs a registered agent to receive their legal documents and government notices on their behalf. The registered agent should have a physical address in the state where the LLC is physically present. Technically speaking, you can even serve as your LLC’s registered agent or hire a professional one.
- Apply for an EIN: After filing the Articles of Organization, you need to get a Federal Employer Identification Number (EIN) from the Internal Revenue Service (IRS).
It’s a nine-digit number that identifies your LLC for tax purposes. You can apply for it through the IRS website or by mail, phone, or fax. If you’re not from America, you can fax or email the Form SS-4.
- Obtain necessary licenses and permits: Every business entity requires licensing and permits to function legally, and your LLC is no different. You can check with your local authority to understand what licenses and permits you need to get your services up and running. Usually, you’ll need a license to protect your services and legalize them completely.
- Open a separate business bank account: Once you have an EIN and obtained the required licenses and permits, you can open a professional bank account for your LLC. We’re flag bearers of separating your private and business financing since it’s much better this way.
Benefits of a Multi Member LLC?
An MMLLC offers many benefits to its members/owners. Here are some key advantages:
- Limited Liability Protection: Much like a single member LLC, aN MMLLC provides limited liability protection to its members/owners. The personal assets of the members remain protected from the liabilities and debts of the LLC in times of trouble. In legal claims or financial problems, the member’s personal assets are risk-free.
- Shared Decision-Making: In an MMLLC, all the members/owners shoulder the responsibility, decision-making, and management of the company. Multiple perspectives and skills, division of labor, and efficiency are always a boon for the company.
- Tax Advantage: By default, a MMLLC is considered a pass-through entity for taxation purposes. Pass-through taxes pass all business profits and losses onto the LLC’s members/owners for personal tax returns. As a result, the tax process gets simplified and offers multiple tax advantages(obviously depending on individual situations).
- Credibility and Professionalism: Compared to a sole proprietorship or a partnership, a MMLLC always stands out as more credible and professional. It appears as a formal business structure and limited liability protection, which can be a pro when dealing with clients, customers, or business partners.
- Flexibility in ownership and profit distribution: It goes without saying, but an MMLLC offers flexibility in terms of ownership structure and profit sharing. The members/owners can decide on the ownership percentage and how profits and losses get distributed among everyone.
Drawbacks of a Multi Member LLC?
While there are a lot of benefits to forming a MMLLC, there are also a few drawbacks to consider. Here it goes,
Probably the biggest drawback of this business structure is its members/owners can be held responsible for other members’ actions and results. The members/owners of an MMLLC can be held liable if they:
- Waste/misuse the company funds, including the business bank account.
- Commit fraud or scams like lying on loan applications, misrepresenting their company, or running a debt-ridden business.
- Get involved in illegal activities, or cause harm to other people.
- Fail to maintain accurate and detailed records, like minutes of meetings and other legal and financial documents.
Member liability aside, there are some other drawbacks of multi member LLCs entrepreneurs should know:
- Complicated Decision-Making: We do agree that shared decision-making is a benefit at best, but at worst, it can lead to unnecessary difficulties and fights amongst its members/owners.
- Difficulty in welcoming/removing members: Adding or eliminating members in an MMLLC is much more complicated than in a partnership or sole proprietorship. Even if your operating agreement has clear guidelines for admitting new members or handling resigning members, it can still be annoying with legal and financial considerations involved.
- Possible fights and disagreements: Because there are multiple members/owners in an MMLLC, the chances of fights, disagreements, and conflicts increase due to different goals, opinions, work ethics, and contributions.
How are Multi Member LLCs taxed?
MMLLCs are taxed like a general partnership. By default, the IRS considers an MMLLC as a general partnership. They do have the option of being taxed like a corporation.
Changing the tax status of an MMLLC to an S Corp requires filing Form 2553 with the IRS. And to be taxed like a C Corp, the MMLLC needs to file Form 8832 with the IRS. If the LLC chooses to be taxed like an S Corp, or a partnership, it will be granted the status of a pass-through entity.
The profits and losses of an MMLLC are shared between all members/owners based on the percentage of the company they own. Even if they don’t actively take money from the LLC, they’ll still be taxed on their share of profits.
In general, Multi member LLCs pay the following taxes:
- Self-employment Tax
- Federal Income Tax
- State and Local Income Taxes(if applicable)
Remember that different states in America have different laws regarding the taxation of MMLLCs. Some states function the same as the federal government and don’t imply corporate tax, while other states impose a special tax on LLCs.
Multi Member LLC vs Single Member LLC
Both MMLLCs and SMLLCs are, well, LLCs. So, they are bound to have similar business structures that provide their owners/members with liability protection.
Before we get into how they’re two different entities, let’s go over the similarities very quickly,
- Limited Liability Protection: Obviously! They’re separate entities from their members/owners and provide limited liability protection against the LLC’s risks, debts, financial obligations, lawsuits, and litigations.
- Pass-through Taxation: Both SMLLCs and MMLLCs are pass-through entities. And as mentioned earlier in this blog, pass-through taxes pass all business profits and losses onto the LLC’s members/owners for personal tax returns.
- Privacy: With both SMLLCs and MMLLCs, the owners/members get a degree of privacy and confidentiality. The liberal structure of an LLC allows members to conduct business from the company’s name instead of their personal names, which protects their privacy.
Onto the difference now! The most obvious difference is that an MMLLC has multiple owners/members while an SMLLC has only one. Here are some key differences between the both:
- Management: In a single-member LLC, the owner has full control over the LLC’s activities and decision-making. While in a multi-member LLC, all the management responsibilities and decision-making is shared among the owners/members, depending on the conditions outlined in the operating agreement.
- Formation: The formation process of a single member LLC is much more straightforward than that of a multi member LLC. SMLLCs often need fewer documents and formalities in terms of ownership.
- Taxation: Even though both SMLLCs and MMLLCs are by default considered pass-through entities, there are some differences in tax reporting needs or treatment based on the total owners/members and any additional tax elections made by the LLC.
You can decide which business entity to go for through the above similarities and differences. It’s important to remember that specific requirements and regulations may vary depending on state-by-state analysis.
You can consult an attorney or a business professional familiar with your state laws for accurate and tailored guidance.
How to pay yourself from a Multi Member LLC?
Ultimately, your operating agreement should clearly outline how the members/owners of your LLC are supposed to be distributing the revenue and profits amongst themselves. Although, as a member, you can use a few methods to pay yourself from an MMLLC.
Remember that before taking any advice or making a solid decision, it’s best to consult with an accountant or tax expert to receive guidance on your unique situation.
- Member Distributions: Members of your MMLLC can receive payments through distributions of profits. These distributions can be the same as each member’s ownership percentage or as mentioned in the operating agreement. Normally, these distributions are not subject to payroll taxes.
- Guaranteed Payments: If you are actively involved in the day-to-day activities of the LLC and provide services to the business, you may receive guaranteed payments. Guaranteed payments are pretty similar to salary or wages and will be subject to self-employment taxes. These payments are mentioned in the operating agreement or set through a separate member agreement.
- Owner’s Draw: If you have put personal funds into the MMLLC, you may be able to withdraw money as an owner’s draw. Such a method allows you to take out money as needed, but as we’ve emphasized earlier, it’s important to separate personal and business funds for proper accounting and tax purposes.
- Salary or Wage: In some cases, multi-member LLCs can elect to pay members a salary or wage. This approach involves treating the members as employees of the LLC and requires setting up payroll, withholding taxes, and issuing W-2 forms. You can consult with an accountant or tax professional to make sure compliance with payroll tax requirements and employment laws.
Forming an MMLLC offers many perks, allowing you to run your LLC in spirit without worrying too much about your private assets and life savings being at risk.
By making the best use of our guide, you can boost the success the potential of your business with an MMLLC.
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Frequently Asked Questions (FAQs)
A multi-member LLC requires a minimum of two members to function, but it can have unlimited members.
No, the level of involvement in the operations and activities of the LLC can vary from member to member. Some members may be actively involved in managing the business, while others may have a more passive or limited role.
Yes, in many states, a member/owner of a multi-member LLC is a member/owner of another LLC or corporation. It allows for a more liberal flexibility structure and can be advantageous for legal or tax planning purposes.
A member can usually withdraw from a multi-member LLC. The member withdrawal or elimination process should be mentioned in the operating agreement. It may involve:
- Buyout provisions.
- Valuation of the member’s interest.
- Other terms agreed upon by the members/owners.
New members/owners can be added to a multi-member LLC. The process for adding new members is usually mentioned in the operating agreement. Depending on the circumstances, it may or may not require the consent of existing members/owners or follow a specific procedure.