You're about to read an advanced step-by-step guide to “Multi-Member LLC”. So, if you want to know:
Then you must read this. Let’s dive right in!
These takeaways provide a comprehensive overview of the structure, formation, management, and taxation of multi-member LLCs, highlighting their flexibility and the importance of a well-drafted operating agreement.
A multi-member LLC, aka a MMLLC, is a limited liability company (LLC) with more than one member; they control the company together. So you now know the dictionary definition of “multi-member LLC”.
But you still want to know what a multi member LLC really is? That's next. Keep reading!
A limited liability company can have an infinite number of members or owners, these members can be individuals, others LLCs, or corporations. If your LLC has one member, then your LLC is called a single member LLC.
If your LLC, however, has more than one member (>1) then your LLC is a multi member LLC. MMLLC is an acronym for multi-member LLC. Having a MMLLC offers the flexibility of a partnership plus the “personal asset protection” of a corporation.
Your MMLLC’s asset protection is a result of the fact that it is a separate legal entity from its members. In the event of lawsuits by creditors, members can fall asleep that night assured that their personal assets, such as their real estate or personal bank accounts, will not be subject to collection.
When you form a multi member LLC, in the LLC’s operating agreement, each member's share of profits and losses should be clearly stated. Generally, each member’s share (that is distributed to him), is proportional to the percentage interest in the business he or she has. For example, I have a friend, Zack, who married his long time friend, rachel.
Rachel, being the creative type, decided to open a bake shop. Zack, being the business savvy man that he is, joined forces with his wife, Rachel. Both Rachel's and Zack’s names were on the lease for the space they rented. Zack’s and Rachel’s distributive shares were 50% each. However, if Zack and Rachel would have specified in their operating agreement an arrangement other than a 50-50 split, then the profit distribution most likely would have been consistent with the specification they set in place.
You do have the flexibility to divide profits and losses using something other than the percentage of interest that each member has. It's all up to you. Just specify it in your LLC’s operating agreement.
The choice to construct your LLC as a single-member LLC (SMLLC) or a multi-member LLC (MMLLC) is totally yours. Most people choose a MMLLC option in the following situations, when starting a business:
In Zack and Rachel’s situation, they formed a multi member LLC to shield their personal assets from the bake shop’s debts. When the Covid-19 pandemic hit, they struggled to pay their rent and eventually struggled to pay various other bills. Throughout their entire debacle, their personal assets and finances were protected.
At this point you understand what a multi member LLC is. However, I must tell you that there are 2 different types of multi member LLCs. The difference between the 2 may have a tremendous impact. For this reason, it is important for you to understand the differences between them.
I'll cover that next. Keep reading!
As you read earlier, when you form your multi-member LLC, your members must make a number of important decisions. One of those decisions is to decide whether the business will be a member-managed LLC or a manager-managed LLC. This decision is important as it affects how your business will operate.
Member Managed LLC - Unless specifically specified otherwise, your MMLLC will be a member-managed LLC, according to your state. This means that by default, your state considers a MMLLC to be a member-managed LLC. In a member-managed LLC. all the members in the business operate the business, collaboratively. All members of your multi member LLC are authorized to make decisions, sign contracts, and manage operations, on behalf of your business.
Manager managed LLC - if your multi member LLC has many members, you may prefer to construct your MMLLC as a manager-managed LLC. Doing so means that a manager is appointed to be responsible for the daily operations. This does not mean that the members don't have any power at all. On the contrary, in a manager-managed LLC, the owners still have the power to make important business decisions. Nevertheless, the manager, appointed, runs the day-to-day operations.
The choice of having your multi member LLC constructed as manager-member LLC or a member-managed LLC is to be specified in the business’s operating agreement.
In case you were wondering, in Zack's and Rachel's situation, they opted to have the MMLLC constructed as a member-managed LLC. As a result, both Zack and Rachel were authorized to make important decisions on behalf of their bake shop. At this point, you may have decided that you are ready to create a multi member LLC. The problem is that you don't know how to form a multi member LLC.
How do you form a multi member LLC? Good question.
That's next. Let's keep on going!
When you think about it, forming a multi member LLC boils down to 6 steps.
You probably have a name you want to use for your business. For this reason, check if the name you want to use is available. You can check your state’s Secretary of State database. However, the more efficient way of checking whether or not your preferred business name is available in your state is to use a free tool. For example, you can use CorpNet’s free trademark search tool to determine if any other business has filed for a trademark on the name.
Your business will need a unique identification number, tiy Employer Identification Number (EIN). Your EIN will allow you to open bank accounts, file for permits and licenses, hire employees, and manage other important business items. The IRS gives you an EIN for free.
In order to legally register your LLC in your state, you must file Articles of Organization with your state. The information you need to provide depends on your state. However, generally, the information you will need to provide is as follows:
Although legally you may not need an LLC Operating Agreement, you kinda are gonna need one for your multi member LLC’s survival. Essentially, the purpose of an Operating Agreement is to specify the roles and responsibilities of your LLC’s members and managers (if your MMLLC is a manager-managed LLC).
In addition, your LLC’s Operating Agreement specifies the ownership interests, profit distribution strategy, how to handle disputes between members, voting rights for members, and other important details A good operating agreement can really serve as the constitution and amendments for your business.
Depending on your type of business and where you are located, there is a good chance that you will need business licenses and permits to legally operate. You should contact your Secretary of State office, county,and municipality to find out what licenses and permits your business needs.
In order to ensure that you don't pierce the corporate veil you worked so hard to create, set up a bank account specifically for you LLC.
Ok, so you now know how to form a multi member LLC. But still, you ask the question “How are MMLLCs taxed?”. That's a great question. Stay tuned. That's cooking up now…
By default, multi-member LLCs are treated as if they are a partnership when it comes to taxes. While this is a multi-member LLC default tax classification, you can opt to pay taxes as an S corp by filing Form 2553 or as a C corp by filing Form 8832.
Assuming you don't elect to have your multi-member LLC taxed as an S corp or a C corp, you will be taxed as a partnership.
Here’s the breakdown.
The IRS considers a multi member LLC to be a pass-through entity. This means that the business does not pay taxes on the business level. Instead, both profits and losses flow from the business to each member’s personal income. Depending on each member’s portion of the profit distribution, each member will pay taxes on his own share. It does not matter if you actually received the money; even if you did not, you still need to report your share of the profit distribution and pay taxes on it.
Let’s get back to my good friends Zack and Rachel whose profit distribution was 50-50. In 2018, their business earned ~$100,000 in net profit.
For taxes, their business had to file Form 1065, U.S. Return of Partnership Income, which reports their business’s annual profits and losses. Notice how the business only reported profits and losses, but did not pay anything. In addition, their business had to complete a Schedule K-1 to track Zack’s and Rachel's (members) ownership stake. Both Zack and Rachel report profit and losses from the Schedule K-1 on their federal tax returns. Zack and Rachel then went ahead and attached their Schedule K-1 forms to their personal tax form.
Multi member LLC owners pay the following taxes:
This is how a MMLLC is taxed. However, you may want to know the exact differences between a single member LLC and a multi member LLC. When Zack and Rachel were considering whether they should construct their LLC as a SMLLC or a MMLLC, they mapped out the differences between the two. This is what they came up with.
| Differences | Single Member LLC | Multi Member LLC |
|---|---|---|
| Amount of Members | 1 | 2 or more |
| Taxes | Sole Proprietor | Partnership |
| If Audited. | You are at risk | Only the business is at risk |
| Management | Only you can manage | Others can manage as well |
The most obvious difference between a single member lLC and a multi member LLC is the fact that a single member has only 1 member while a multi member lLC can have 2 or more. Regardless if you choose to form a single or multi member LLC, you are establishing a separate entity from yourself.
If you would not have registered your business as an LLC (you would either be sole proprietor or a partnership), you would create a legal entity separate from yourself. As a result, your personal assets would be at risk in the event of someone suing you. Opting to be a single member LLC means you get to run your own show, you are alone. This is neither a pro nor a con.
On the one hand, you don't have to worry about pleasing others, you get to decide on your own accord. On the other hand, however, you also have to deal with every single responsibility that comes with having a business, which can be stressful. For a multi-member LLC, however, you get to run a company with multiple owners, which means you get to brainstorm together, capitalize on each other’s ideas, and share the stress with others. On the flip side, having more than one owner means that you will, at some point, have to compromise on an idea or goal.
In a situation where a single business owner would prefer to form a multi member LLC, they can add their spouse, parent, or child as members of the company.
The other difference between the two business entities is the way they pay taxes. Single member LLCs pay taxes like sole proprietorship unless they elect otherwise.
Muti member LLCs, however, automatically pay taxes like a general partnership unless they obtain different tax treatment (as we explained earlier, indepth). As a result single member LLCs do not need to to fill out additional forms or a Schedule-K-1 for taxes. Instead, a SMLLC should report profit and losses on his own tax return.
Furthermore, if the IRS decides that your LLC should be audited, being a multi member LLC probably puts you in a safer position. A SMLLC’s taxes are reported on your own personal tax return.
As a result, if the IRS audits your business, your personal life will automatically be exposed. However, if your multi member LLC is audited, your personal life will not be exposed. The reason for this is because your business’ taxes are reported on a different form, separate from your personal tax return.
Additionally, in terms of management of the company, the owner of a SMLLC doesnt share the management responsibilities with anyone else. In other words, the owner is both the owner and the manager. However, in a multi-member LLC, the owner can choose how the business will be managed. It can be a:
Great! Now that Zack and Rachel determined that they would construct their LLC as a multi member LLC, another important point they considered was the differences between a multi member LLC and a partnership.
Multi member LLCs and partnerships share similarities. However they do share some differences.
| Features | Multi Member LLC | Partnership |
|---|---|---|
| Legal Business Entity | ✅ | ✅ |
| Multiple Owners | ✅ | ✅ |
| Pass-Through Taxation | ✅ | ✅ |
| Liability Protection | ✅ Personally Protected | ❌ Personally Liable |
Both Zack and Rachel preferred to have their personal assets protected. For this reason they opted for a multi member LLC. However, they needed to know the exact ramifications of their decision.
What are the pros and cons of a multi member LLC? Again, they mapped the advantages and they mapped out the disadvantages.
The biggest advantage of forming a multi-member LLC is that the members have their personal assets protected. Meaning that if someone pursues legal action against your business, if your business was legally compliant, then your personal assets will not be at risk. Other benefits of forming a multi-member LLC include:
Your assets are susceptible to risk if your LLC is not compliant. You can be personally liable if:
Here are a few other drawbacks:
After weighing the pros and cons of a multi member LLC, Zack and Rachel decided that a multi-member LLC was the best suited for them. However, they still had to get one point straight, a multi member LLC operating agreement. What is a multi member LLC operating agreement? Why is it so important?
Having an LLC operating agreement for your multi-member LLC is crucial. The operating agreement is a written document that outlines how the company will operate. Essentially, it is a legally binding contract between all the members of the multi-member LLC and covers all the aspects of business operations. Like voting rights, management structure, investments, taxes, and profit-sharing.
The following information is generally included in an LLC’s operating agreement:
Similar to a single member LLC, a multi member LLC may also pay themselves through the owner's draw method. Each member can draw as many shares as they want, as long as sufficient funds remain for day-to-day business expenses. In other words, as a member, you simply write yourself a check or transfer money from your LLC’s bank account to your personal bank account.
A multi member LLC or a MMLLC, is a limited liability company (LLC) with more than one member.
Step #1: choose a business name.
Step #2: apply for an EIN.
Step #3: file Articles of Organization for your LLC.
Step #4: create an operating agreement.
Step #5: apply for necessary business licenses and permits.
Step #6: open a separate bank account for your business.
If your LLC already obtained an Employer Identification Number (EIN), then you have to file Form 8832 with the IRS to elect to pay taxes as a partnership and provide the names of the new members.
Any friends and partners can form multi member LLCs. The most popular types of multi-member LLCs are companies run by a husband and wife. A multi member LLC can be created in all 50 states and can have as many members as wanted unless the LLC elects S corporation status, which would limit the amount of members to 100.
The members of the multi member LLC decide how they prefer the LLC constructed. Some prefer to elect one member or a third party to oversee and manage the business. This is called a manager-managed LLC. If, however, all the members prefer to equally participate to oversee and manage the business, then it’s a member-managed LLC.
Yes. a multi member LLC (MMLLC) is the term used for an LLC that has 2 or more members / owners. In a multi member LLC, there are no limits to the number of members / owners that the LLC can have.
