A limited liability company (LLC) with two or more members is a multi-member LLC (MMLLC).
Like a single-member LLC, a MMLLC is a type of business entity that combines the flexibility of a partnership with the limited liability of a corporation. (Limited liability simply means that there’s a legal shield between the owner’s personal assets and the business if the business is ever sued.)
While an LLC doesn’t have the typical tax savings of other business entities, it can be a lot less confusing for entrepreneurs.
LLCs are organized under state rules, and for federal purposes, may be treated as a corporation, partnership, or as part of the business owner’s personal taxes. This is called an LLC’s tax treatment. You can request to change your tax treatment by submitting the appropriate form to the IRS, which we’ll get into later.
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 its liability protection.
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. If your business is unable to pay its company’s debts, creditors can only go after the business’s assets. The exception 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, 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 corp or C corp.
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 be held liable if they:
- Misuse company funds, including the bank account
- 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 are multi-member LLCs and their owners taxed?
Multi-member LLCs are 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.
Multi-member LLCs are pass-through entities, which means the company itself doesn’t pay taxes. Instead, profit and losses flow from the business to each member’s personal income tax return.
Profit and losses are allocated to each member regardless of whether members receive any actual money. Even if members don’t take money out of the business, they still report their share of the profit and pay taxes on it.
How much is allocated to each member depends on the percentage 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:
|Rosana’s share (60%)||$60,000|
|Araceli’s share (40%)||$40,000|
At tax time, the business is required to file Form 1065: U.S. Return of Partnership Income, which reports its annual profit and losses. The company also completes a Schedule K-1 for each owner, which reports their share of the profit 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)
How do I pay myself from a multi-member LLC?
Members can pay themselves by taking a distribution of their portion of the profits.
Remember, 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 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 a single-member LLC?
The most obvious difference between the two types of LLCs is the number of owners.
Single-member LLC vs. multi-member LLC
|Type of LLC||Number of owners|
|Multi-member LLC||2 or more|
But, there are cases where a single business owner may want to form a multi-member LLC. A person starting a business could form 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. 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, profit and losses are reported directly on the owner’s personal tax return, simplifying the filing process.
Finally, when it comes to the management of the business, the owner of a single-member LLC doesn’t share management responsibilities. The person is both the owner and the manager.
In a multi-member LLC, the owners choose how the business will be managed. It can be either:
- Member-managed LLC, which means all members participate in the business, or
- Manager-managed LLC, which means the members designate one member or a third-party to manage the operations.
What’s the difference between a multi-member LLC and a 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 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 general partnership are taxed the same way because multi-member LLCs are automatically taxed as general partnerships unless they request otherwise.
What’s the difference between a multi-member LLC and other types of partnerships?
There are a few main differences between a multi-member LLC, a limited liability partnership (LLP), and a limited partnership (LP).
Multi-member LLC vs. LLP
- In many states, LLPs 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 have liability protection from other partners’ actions and debts. In a multi-member LLC, there are cases where members can be held liable for other members’ actions.
- An LLP can’t change its tax classification. Multi-member LLCs can choose to be taxed as a general partnership, S corp, or C corp. LLPs can only be taxed like a general partnership.
- LLPs can only be owned by individuals. Multi-member LLCs can be owned by individuals, other LLCs, and corporations.
Multi-member LLC vs. LP
- LP general partners are personally liable for the business while limited partners receive liability protection. In a multi-member LLC, in most cases, all partners have personal liability protection.
- 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 a multi-member LLC, all members can manage the business without affecting their liability protection.
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).