A limited liability company (LLC) with two or more members is known as a multi-member LLC (MMLLC).
Married couples with small businesses, family-owned businesses, friends going into business together for a startup, and businesses with multiple owners often form this type of LLC because of this liability protection.
Read on to learn more about multi-member LLCs, or jump to the bottom of this post to watch an explainer video on the topic.
What are the main characteristics of a multi-member LLC?
Multi-member LLCs share four primary characteristics: two or more owners, a flexible management structure, limited liability protection for their members, and pass-through taxation. We’ll take a look at these characteristics in greater detail below.
Flexible management structure
Ownership in a multi-member LLC is shared between two or more people, other LLCs, or corporations. This business entity type also allows its owners—or members, as they’re usually called—to choose how the business will be managed.
Multi-member LLCs can be either:
Member-managed, which means all members participate in the business, or
Manager-managed, which means the members designate one member or a third party to manage the operations.
Limited liability protection
Like a single-member LLC, an MMLLC offers its owners limited liability protection. This means that there’s a legal shield between the owner’s personal assets and the business if the business is ever sued.
Pass-through taxation
Generally, multi-member LLCs are pass-through entities, which means the company itself doesn’t pay federal income taxes. Instead, profits and losses flow from the business to each member’s personal income tax return.
However, an LLC’s members can elect to have their business taxed as a C corporation (C corp) or an S corporation (S corp) instead. You can request to change your tax treatment by submitting the appropriate form to the Internal Revenue Service (IRS), which we’ll get into in the next section.
How are multi-member LLCs and their owners taxed?
While an LLC doesn’t have the typical tax savings of other business entities, it can be a lot less confusing for entrepreneurs.
Multi-member LLCs are typically treated like general partnerships when it comes to taxes. While this is their default tax classification, multi-member LLCs can request to be taxed as an S corp by filing Form 2553 or taxed as a C corp by filing Form 8832.
The company’s profits and losses are allocated to each member of the LLC, regardless of whether they receive any money. Even if members don’t take money out of the business, they must still report their share of the profit and pay taxes on it.
How much is allocated to each member depends on how much of the company they own.
Let’s go through a simplified example. Rosana and Araceli are co-owners of a multi-member LLC. Rosana owns 60% of the company, and Araceli owns 40%. The company earns $100,000 in annual profit.
Here’s how the profit will be allocated:
Total profit | $100,000 |
Rosana’s share (60%) | $60,000 |
Araceli’s share (40%) | $40,000 |
At tax time, MMLLCs are required to file Form 1065: U.S. Return of Partnership Income, which reports the company’s annual profits and losses. The company also completes a Schedule K-1 for each owner, which reports their share of the profits or losses. Members report profit and losses from the Schedule K-1 on their federal tax returns.
Multi-member LLC owners pay the following taxes:
Self-employment tax (15.3% on 92.35% of the member’s share of the profits)
Federal income tax (based on the owner’s federal tax bracket)
State and local income taxes (if applicable)
What are the benefits of a multi-member LLC?
The biggest benefit of forming a multi-member LLC is that the owners (known as members) have personal asset protection. That means if someone sues your business, in most cases, only the business’s assets are at stake.
The liability protection of a multi-member LLC extends to the business’s debt, too. If your company is unable to pay its debts, creditors can only go after the business’s assets. The main exception here is if you sign a personal guarantee for the business’s debt. Then your personal assets are at risk.
Here are a few other benefits of starting a multi-member LLC:
There’s no limit to the number of members allowed.
Members can be individuals, other LLCs, or corporations.
Members can be non-U.S. citizens.
The company doesn’t pay corporate tax.
Businesses can opt to be taxed as an S corporation or a C corporation.
LLCs are also eligible for the 20% pass-through deduction.
What are the drawbacks of a multi-member LLC?
The biggest drawback of a multi-member LLC is that, in some instances, members can be held responsible for other members’ decision-making and actions when doing business.
Members can also be held liable if they:
Misuse of company funds
Knowingly do something that’s reckless, illegal, or causes harm to another person
Commit fraud, such as misrepresenting the business, lying on loan applications, or continuing to run a company that can’t pay its debts
Fail to keep adequate records, such as legal documents, financial records, or minutes from meetings
Here are a few other drawbacks of multi-member LLCs:
They require registration, which includes selecting a business name and filing Articles of Organization with your Secretary of State.
There’s more paperwork to file when you’re doing your business taxes.
Members pay self-employment tax on their share of the profits.
Owners can’t be employees of the business unless they change their tax status.
How to form a multi-member LLC
1. Choose your business name
The name you choose should meet your state’s LLC naming requirements. For example, you should make sure your business name includes a term like “LLC” or “Limited Liability Company” in it.
When choosing a name for your new MMLLC, you’ll also need to decide on one that isn’t already being used by another business in your state. If you plan on starting an online business or one that operates in multiple states, consider choosing a name that’s also available in other states.
To find out if your chosen name is available, conduct a name availability search through your state’s Secretary of State website.
2. Choose a registered agent
A registered agent accepts legal documents and other correspondence on behalf of your business. They should have a physical address in the state your LLC is registered in, and they must also be available during regular business hours.
Keep in mind that, in many states, information about a business’s registered agent is available to the public. This is why business owners often hire a registered agent service for their LLC.
3. File articles of organization with your state
To formally establish your multi-member LLC, you’ll need to file articles of organization (also known as a certificate of formation) with your state. In this document, you must provide information about your new business, including:
The LLC’s name and address
The company’s statement of purpose
Registered agent’s name and address
Names of the LLC’s members, managers, and directors
Most states also charge business owners a filing fee to complete the formation process, so check with your Secretary of State’s office for more information.
4. Create an operating agreement
LLCs must have a comprehensive operating agreement to define how the business will be managed and operated. This document is particularly important for multi-member LLCs, as it helps prevent conflicts and ensures that each member understands their rights and responsibilities.
Your MMLLC’s operating agreement should have details on the following:
Each member’s initial contributions, management responsibilities, and ownership stake in the company
How profits and losses should be distributed among members
Meeting procedures and voting rights in the company
How to add, change, and remove LLC members
5. Apply for an EIN
A federal employer identification number (EIN) is a nine-digit tax identification number issued by the IRS to identify businesses on tax forms and other federal documents. Business owners also use their EIN to hire employees, pay taxes, and open a business bank account.
Apply for an EIN for free on the IRS website. Once you receive an EIN, make sure to save the confirmation letter for your records.
6. Obtain any required business licenses or permits
Certain businesses must have additional licenses or permits before they can begin operations in the state. For instance, businesses that collect sales tax must have a sales tax license. Those planning to hire employees will need a state tax ID number.
You may be required to register your LLC with your county or city as well. Check with your Secretary of State’s office and local agencies for details.
7. Open a business bank account
You should also open a dedicated bank account for your business. Keeping your business and personal finances separate helps preserve your LLC’s limited liability protection by ensuring your funds don’t mix.
You’ll typically need the following information to open a bank account for your new business:
Personal identification
Your LLC’s name, EIN, address, and phone number
Names of the people who will be listed as owners of the account
How do I pay myself from a multi-member LLC?
MMLLC members can pay themselves by taking a distribution of their portion of the profits. (Keep in mind that the distribution of profit is different from the allocation. Members may receive a distribution that’s less than the amount allocated to them for tax purposes.)
Your LLC’s operating agreement should spell out how, when, and to whom profits are distributed.
Sometimes, an LLC may elect to be treated as a C corp or S corp for tax reasons. LLCs taxed as a C corp or S corp are required to pay their owner-employees “reasonable compensation.”
Owner-employees are LLC members who are involved in the daily operations of the business and who are paid a salary through payroll software. When that happens, you receive employee wages from the corporation rather than a distribution.
There’s no federal guideline for reasonable compensation, so it’s best to talk to an accountant when determining owner-employee salaries. A general rule of thumb is that an owner-employee should receive 60% of their share of the company’s profit through a salary and 40% through a distribution.
The business pays payroll taxes on the owner-employee’s wages (7.65%), and the owner-employee also pays payroll taxes on their business owner salary (7.65%). Owner-employees also have federal income tax withheld from their paycheck.
What’s the difference between a multi-member LLC and other business entity types?
Multi-member LLC vs. single-member LLC
The most obvious difference between the two types of LLCs is the number of owners.
Type of LLC | Number of owners |
Single-member LLC | One |
Multi-member LLC | Two or more |
However, there are cases where a single business owner may want to form a multi-member LLC. A person starting a business could start a multi-member LLC and add their spouse, parent, or children as members of the company for asset protection.
Asset protection means that anyone who’s a member of the LLC can’t have their personal assets, like their car, house, or savings, taken in the event of a lawsuit. While the individual is the one running the business, their family members will receive liability protection.
The other difference between a single-member LLC and a multi-member LLC is the way they are taxed. Single-member LLCs are considered a disregarded entity and automatically taxed like sole proprietorships unless they request otherwise. On the other hand, multi-member LLCs are automatically taxed like general partnerships unless they change their tax treatment.
Unlike multi-member LLCs, single-member LLCs don’t need to fill out additional forms or a Schedule K-1 at tax time. Instead, profits and losses are reported directly on the owner’s personal tax return, simplifying the filing process.
Multi-member LLC vs. general partnership
There are two main differences between a multi-member LLC and a general partnership.
The first is that a general partnership, unlike a multi-member LLC, doesn’t require registration with the state. If you and another person run a business together, you’re automatically considered a general partnership until you form a legal entity.
The second difference is liability protection. In a general partnership, owners don’t have any liability protection between their personal assets and the business. If the company is sued or can’t pay its debts, partners will have to pay their own money toward legal fees and creditors.
In a multi-member LLC, partners receive limited liability protection. In most cases, only the business’s assets can be used to pay claimants and creditors.
A multi-member LLC and a general partnership are taxed the same way because MMLLCs are automatically taxed as general partnerships unless they request otherwise.
Multi-member LLC vs. limited liability partnership
In many states, a limited liability partnership (LLP) can only be formed by certain professions, such as doctors, dentists, lawyers, accountants, and architects. Multi-member LLCs can, in most states, be formed by any business.
Partners of an LLP also have liability protection from other partners’ actions and debts. In an MMLLC, however, there are cases where members can be held liable for other members’ actions.
An LLP can’t change its tax classification, and it can only be taxed like a general partnership. Multi-member LLCs can choose to be taxed as a general partnership, S corporation, or C corporation.
Finally, LLPs can only be owned by individuals, while individuals, other LLCs, and corporations can own multi-member LLCs.
Multi-member LLC vs. limited partnership
General partners in a limited partnership (LP) are personally liable for the business, while limited partners receive liability protection. In a multi-member LLC, all partners typically have personal liability protection.
Additionally, only LP general partners can be involved in the management of the business. If a limited partner becomes involved in the management of the business, they could lose their liability protection. In an MMLLC, however, all members can manage the business without affecting their liability protection.
Why choose a multi-member LLC over other types of business entities?
A multi-member LLC allows you to share ownership of the business with co-founders or investors. You can choose whether you will manage the business yourself with your partners or whether you will hand off management to a third party. Structuring your business as an LLC also enables you to determine for yourself, along with the other owners, how the venture will operate.
This type of business structure also protects your personal assets in case you’re unable to cover your LLC’s debts—and it does so without the complicated requirements and additional costs of a corporation.
Finally, MMLLC owners can take advantage of pass-through taxation so they can avoid the double taxation that often occurs with corporations. Alternatively, they can elect to be taxed as a C corp or S corp to reap additional tax benefits.
Video: Multi-member LLCs, explained
What’s a Multi-Member LLC?
Now that you’re up to speed with multi-member LLCs, you can begin the business structure decision process for you and your plus one (or two or three).
