Exploring Eligibility: Who Can Be LLC Members?
By Bazal Razzaq
Updated: July 14, 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?
- The Power of Partnership: Unleashing The Potential of A Multi Member LLC
- C Corp vs LLC – Which Business Structure is Right for You?
- A Guide to Business License: Everything you need to know
- Unlocking the Benefits of an LLC (Limited Liability Company)
- Which is the best state to form an LLC in?
- 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
- 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?
If you’re considering forming a limited liability company(LLC), you’re probably wondering who can be LLC members. After all, what’s a company without members? Understanding who can be a member/owner of your LLC is an important step in forming your new LLC.
For those who have no clue, an LLC is a legal business entity that provides liability protection similar to a corporation and various other features like tax flexibility like a partnership. From a legal viewpoint, LLCs are a relatively new business structure.
Even though requirements regarding who can be the members/owners of an LLC are pretty flexible, it’s important to be aware of any state-specific rules and regulations before finalizing your company structure.
It would be best if you took a significant chunk of time to determine who will be a member/owner of your LLC. So without much dilly-dallying, let’s begin!
What is An LLC Member?
An LLC member, also popularly known as an LLC owner, is an individual or entity that owns an interest in a limited liability company. Simply put, they have a stake in the company. An individual/entity will still remain an LLC member/owner whether they own 100% or 1% of the LLC (or even less).
These members contribute capital to the LLC, whether in the form of money, property, or services. In return, they receive a share in profits and losses incurred by the company. They also have a say in the decision-making in business operations and activities, either directly or through voting rights.
The specific roles, rights, and responsibilities of LLC members/owners are highlighted in the operating agreement, which, if you remember, is a legal document that sets forth the rules and guidelines for how the LLC will be managed and operated. To ensure the smooth operation of your LLC or avoid any future fights and misunderstandings between the members/owners, you can draft your agreement accordingly. For instance, here are some points you can cover,
- Who can join as an LLC member/owner
- Rights, roles, and responsibilities of each member/owner
- How are membership interests transferred
- What happens if and when a member/owner leaves the LLC?
This way, each member/owner has equal rights within the LLC, regardless of their membership interest.
Who Can Be LLC Members/Owners?
When it comes to an LLC, there’s enough flexibility in deciding who can be a member. Unlike corporations, an LLC does not have fixed ownership shares. Every member/owner of the company can claim ownership.
As you may have read in our previous blogs, the whole process of forming an LLC is typically handled at the state level by submitting the required paperwork/form, usually called the “Articles of Organization” or an equivalent form specific to your particular state. Also, it’s important to note that federal agencies like the IRS(Internal Revenue Service) are not directly involved in forming an LLC.
You may have an idea by now that the LLC ownership rules are not as strict as they’re for corporations. The only valid requirement is they should be at least 18. Now that we’re talking age requirements, it’s essential to note that rules vary state by state.
Some states in America don’t have a set age requirement/obligation for LLC members/owners. In such cases, you need to specify your particular age needs and limitations in your Operating Agreement to avoid unnecessary troubles and maintain compliance.
The select members/owners don’t have to be US citizens or even individuals. Other business entities or organizations can also own a stake in your LLC, like,
- Other limited liability companies(LLCs),
- A holding company that owns the LLC,
- Foreign entities,
- Pension Plans,
- and other legal entities.
Well, the above listing was all organizations. We do know that. But individuals can also claim membership in an LLC, such as in the following cases:
- United States Citizens
- United States Residents
- Non-US citizens
- Non-US residents
- Legal US immigrants
- An IRA(Individual Retirement Account)
- A Non-Corporate Legal Entity
Who can't be LLC Members/Owners?
While there may be a large chunk of the population that can serve as LLC members/owners, there are certain categories of people/entities who may face restrictions. Here’s a list:
- Non-resident aliens: In some states, there’s a restriction/limitation on non-resident aliens(people who are not citizens or permanent residents of the country) claiming any membership in an LLC. Why? Because for a non-resident individual, complications can arise in the form of certain tax issues and legal responsibilities.
- Minors: Well, this is a tricky one. While we do understand that we did mention above that the “age requirements” vary state by state. Even if, in select states, a minor has the right to share a partnership in an LLC, they still aren’t authorized and lack the legal capacity to enter into contracts or own a business. So, they won’t be allowed to become LLC members/owners without the proper consent of a guardian or legal representative.
- Nonprofit Organizations: Nonprofits like charities or foundations may have limitations on owning, co-owning, or running an LLC. These entities are subject to different legal obligations regarding their tax-exempt status and the nature of their business activities.
- Convicted Individuals: It goes without saying, but most US states have strict laws that prevent people with specific criminal convictions from becoming members/owners. These “specific convictions” especially include judgments related to financial or legal fraud or any involvement in illegal business practices.
- Insurance Companies and Other Financial Institutions: Well, depending on your particular state and jurisdiction, financial institutions, banks, and insurance companies are often restricted from owning and running an LLC. These entities are subject to separate regulatory frameworks and may have to limit their involvement in any kind of financial activity.
- Certain Professionals: People in some professions like law, medicine, or accounting have some regulatory restrictions placed on them that can prevent them from owning and maintaining an LLC. It’s not that they have limitations on conducting business altogether. Rather, they may be limited to forming business structures other than an LLC.
While this was a very general draft for your help, please remember that LLC membership requirements can vary by jurisdiction, and specific regulations and restrictions may apply in different states of the US.
How Many LLC Members Are Ideal?
There’s no particular number or restriction placed on the total number of members/owners an LLC can have. It entirely depends on the needs and goals of your business. Some LLCs(single member LLCs) only have one individual in total control of the company. At the same time, some can have multi-members (multi member LLCs). It depends on the nature of the business, the total workload, the preference of the owners, and their level of involvement.
Returning to the question, you can open an LLC with even one member or even twenty co-members as long as your choice aligns with your business objectives and ensures effective decision-making and shared responsibilities.
Important: If your LLC chooses to be taxed like an S-Corporation by the IRS, there will be a restriction on the number of shareholders(members) it can have. The limitation clearly states that an S-Corp can’t have more than 100 members/owners.
Also, in this particular case, restrictions increase even more on who can be an LLC owner/member. If your LLC chooses to be taxed like an S-Corp, the following entities can’t claim membership interest in your business,
- A Corporation
- Non-US Resident
Are LLC Members Responsible for Debts?
No, the members/owners of a limited liability company are generally not liable to pay off/clear the debts and obligations of the company. That is unless they personally agreed to pay back a specific loan.
Additionally, sometimes the lenders may ask the members or managers to guarantee the debt amount if the LLC fails to repay the loan. But generally, members aren’t usually held responsible for the loan, debt, or obligation.
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We understand that by this time, you may already realize that understanding the membership requirements is extremely important, no matter which state you’re in. While LLC membership offers enough flexibility, allowing a wide range of individuals and entities to participate in the company’s ownership and management, you can further simplify everything by drafting an operating agreement.
Whether you’re considering forming an LLC or joining an existing one, understanding the possibilities and complications of different LLC members/owners is extremely important. As always, consult a legal and financial expert to ensure compliance with local rules, laws, and regulations.
Please remember that all the information in this guide is general and informative and doesn’t constitute or intend to replace any legal advice.
Frequently Asked Questions (FAQs)
Usually, LLC operating agreements outline the whole process for removing a member. It often requires the consent of other members and follows the guidelines specified in the operating agreement or relevant state laws.
Yes, operating agreements can specify different ownership percentages and voting rights for members/owners, allowing for flexibility in tax structure and LLC’s management and decision-making process.
By default, LLCs are taxed as pass-through entities, meaning their profits and losses pass through to the member’s tax returns. However, an LLC can also elect to be taxed as a corporation.
Yes, an LLC can be a member of another LLC. This structure is known as an “LLC holding company” and is often used for asset protection and operational efficiency.
The members/owners of an LLC can have different roles and responsibilities within the company. Again, the operating agreement defines the management structure and highlights the decision-making authority of members, managers, designated officers, and employees.