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Multi-Member LLC: What is It, What Are the Benefits

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A multi-member LLC is a business entity with two or more owners, outlining shared ownership, profit distribution, and limited liability protections. Multi-member LLCs are generally preferred over single-member LLC members due to the limited liability protection it provides to the members. Businesses prefer this type of LLC because of its various advantages, including flexibility, advantageous tax treatment, and protection from financial obligations. Let us learn more about multi-member LLCs in the blog below.

What is a Multi-Member LLC?

A multi-member LLC, also called an MMLLC, is a limited liability company that has two or more owners. In an LLC business structure, owners are referred to as members.

MMLLCs can have an infinite number of members and members can be individuals, other LLCs, or corporations. MMLLCs offer the flexibility of a partnership with the asset protection of a corporation.

MMLLCs are separate legal entities from their members so members are protected from liability for the company’s risks and debts. In the event of a lawsuit or action by creditors, members do not have to worry about their personal assets like real estate or personal bank accounts being subject to collections.

It is common to see a multi-member LLC in the following situations:

  • Married couples who start a business
  • Family-owned businesses
  • Friends starting a business together
  • A business with multiple owners

Multi-member LLCs can be formed in any state in the US and both US citizens and non-US citizens have the option to establish an MMLLC.

Click here to learn more about how the IRS classifies an LLC.

Difference Between a Multi-Member LLC and Single-Member LLC

Multi-member LLCs and single-member LLCs (SMLLC) are very similar business structures because they are both LLCs that provide owners with liability protection.

The most obvious difference is that an SMLLC has only one owner while an MMLLC has two or more owners. There are a few other similarities and differences to consider when deciding which type of business to establish.

Similarities

  • Both SMLLCs and MMLLCs are separate entities from the owners and provide the members with liability protection against the company’s risks and debts.
  • MMLLCs and SMLLCs are both pass-through entities. Unless otherwise elected, profits and losses will be reported on the member's personal federal income tax return. In a multi-member LLC, each partner will report and pay taxes on their share of business profit and loss at their set tax rate.
  • The formation of both business entities is very similar in that both types of LLC require that Articles of Organization be filed with the state and formation fees are paid.

Differences

  • Because an SMLLC only has one owner and an MMLLC has multiple owners, the management structure for the company is different. The owner of a single-member LLC acts as the manager while the members of the multi-member LLC must decide whether they will run the company as a member-managed LLC, or a manager-managed LLC.

For more similarities and differences between SMLLCs and MMLLCs, read this article.

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Benefits of Engaging a Lawyer for a Multi-Member LLC

The following are the benefits of hiring an attorney for a multi-member LLC:

  • Legal Compliance: Attorneys can ensure that your LLC's formation and operation comply with all relevant state and federal laws. This involves developing and filing the required paperwork, consisting of operational agreements and articles of incorporation, and ensuring all strategies are accompanied.
  • Customized Operating Agreement: The internal policies, rights, and duties, as well as the organizational structure for an LLC, are outlined in an operating agreement, which is a key legal document. A lawyer can draft an operating agreement and customize it to your LLC's and its members' needs and objectives.
  • Expansion and Restructuring: An attorney can help an individual navigate the legal procedures required as the LLC expands or experiences changes, such as adding or deleting members, combining with another firm, or selling the company.
  • Risk Reduction: By assisting companies in identifying potential legal risks and creating strategies to address them, attorneys can help lower the possibility of expensive legal battles and liabilities.
  • Asset Protection: LLCs are renowned for offering their members limited liability protection; however, this protection may be in danger if specific procedures are not followed. A lawyer can help keep the liability shield in place by ensuring you follow the law and keep accurate records.
  • Dispute Resolution: Having a well-written operating agreement with defined dispute resolution provisions will assist in preventing expensive litigation in the event of conflicts or disputes among members. Lawyers can create clauses that cover the mediation and dispute resolution procedures.
  • Contract Review and Drafting: To ensure the interests are safeguarded, an attorney can evaluate any contracts or agreements your LLC engages with third parties. They can also create legal documents that benefit the LLC's interests.
  • Regulatory Compliance: The LLC may need to abide by particular laws and licenses depending on the nature of the business. A lawyer can aid in understanding and navigating industry-specific standards.

Considerations for a Multi-Member LLC

The following are important factors to bear in mind for a multi-member LLC:

  • Member Agreements: Create a thorough operating agreement that specifies each member's obligations and ownership stakes. Dispute resolution procedures, decision-making techniques, and procedures for accepting new members or removing existing members from the LLC should all be covered in this document.
  • Capital Investments: List each member's initial capital contributions as well as any ongoing capital needs. Include a description of how any potential need for additional capital contributions will be handled.
  • Capital Contributions: List each member's initial capital contributions as well as any subsequent capital needs. Include a description of how any potential need for additional capital contributions will be handled.
  • Allocating Profits and Losses: Choose how members will be divided among profits and losses. This may depend on ownership stakes or other standards listed in the operating contract.
  • Decision-Making: Establish a strategy for making judgments before making important business decisions like signing contracts, buying assets, or making substantial investments. The use of a majority vote, unanimous agreement, or managerial judgment are typical procedures.
  • Voting Rights: Define voting rights and the level necessary to reach judgments. Think about whether some decisions need to be unanimous or just a simple majority.
  • Exit Strategies: Create exit plans for members, such as buy-sell contracts, to cover scenarios when a member wants to sell their ownership interest, retires, or dies.

How Multi-Member LLCs Work

When a multi-member LLC is established, the members must make the important decision of whether the company will be a member-managed LLC or a manager-managed LLC. This decision will affect how the company works.

  • Member Managed LLC: Unless the company’s formation documents specify that the company will be a manager-managed LLC, the state will consider the LLC as a member-managed LLC by default. In a member-managed LLC, the owners of the company all participate in the operation of the business. All members have the power to make important decisions, sign contracts, and manage operations.
  • Manager Managed LLC: A manager-managed LLC is a good option when there are a lot of members in an LLC. A manager is appointed to run the day-to-day operations. The owners still retain the power to make important business decisions, but the manager takes care of the daily operations.

It is important to have an operating agreement for an MMLLC because this document will lay out the management structure as well as the roles and responsibilities of the members and managers in the company.

How are Multi-Member LLCs Taxed?

Multi-member LLCs have flexibility when it comes to federal taxes. By default, the IRS treats an MMLLC like a general partnership. The MMLLC however does have the option to elect to be treated as a corporation.

To change the tax status of an LLC to an S Corp, Form 2553 must be filed with the IRS. To be taxed like a C Corp, the LLC can file Form 8832 with the IRS.

If the LLC is taxed like a partnership or an S Corp, it is a pass-through entity. The company itself will not be responsible for most taxes. The members will report their share of profits and losses on their income tax returns.

In an MMLLC, profits and losses are allocated to each member based on the percentage of the company they own. Even if they do not take money out of the company, they are still taxed on their percentage of the profit.

Owners of an MMLLC will be responsible for the following taxes:

  • Self-employment tax
  • Federal income tax
  • State taxes

Each state will have its own laws regarding how multi-member LLCs are taxed. Some states operate like the federal government and do not implement a corporate tax while other states do require a special tax on LLCs.

Pros of a Multi-Member LLC

Multi-member LLCs provide members with many benefits. The primary benefit is liability protection. Members have asset protection if the company is ever involved in a lawsuit.

Other benefits of an MMLLC include:

  • No limit on the number of members allowed
  • Members can be individuals, other LLCs, or corporations
  • Members do not have to be US citizens
  • MMLLCs are not subject to corporate taxes
  • MMLLCs can elect to be treated as a corporation by the IRS

Cons of a Multi-Member LLC

While the benefits of an MMLLC generally outweigh the negative aspects, there are certain things that an owner should consider when establishing the business.

Liability protection is limited, and, in some instances, members can be held liable for their actions. The biggest issue for a multi-member LLC is that all the members can be held responsible for other member’s actions.

Members of an MMLLC are subject to liability in the following circumstances:

  • The misuse of business funds
  • An illegal activity like fraud
  • Failure to keep required records like meeting minutes

Here is an article that discussed Member-managed LLC vs. Manager-managed LLC.

Multi-Member LLC Operating Agreements

The LLC operating agreement for a multi-member LLC is a very important formation document. The operating agreement is a written document that lays out how the company will be governed. It is a legally binding contract between the members of an MMLLC and covers important aspects of business operations like management structure, investments, taxes, and profit-sharing.

Operating agreements will be tailored to the company they govern but the following basic information is usually included:

  • The name of the LLC and addresses of the business office
  • A statement of intent that confirms the operating agreement complies with state laws and the LLC will be officially established once the required documents are filed with the state
  • The nature and purpose of the business and a statement to cover possible changes in the future
  • The duration of the LLC's existence
  • The tax status of the LLC
  • How the MMLLC will accept new members

The operating agreement will also include whether the company is a member-managed LLC or a manager-managed LLC. It is important to be sure that the agreement specifically lays out all the details of each member and manager’s roles and responsibilities. This will help avoid and solve any future disputes that may arise between members in the future.

Final Thoughts on Multi Member LLCs

Multi-member LLCs offer numerous management choices and are flexible entity types. They can be either manager-managed or member-managed, where specific members or outside managers are assigned to handle the business affairs. Member-managed organizations involve all members in decision-making and daily operations. Multi-member LLCs are a popular option for companies with numerous owners because they combine liability protection, pass-through taxation (where income and losses are passed through to the members' tax returns), and a flexible organizational structure. Understanding the benefits, restrictions, and tax ramifications can make a big difference, even though the procedure can be difficult to navigate. Therefore, hire a counsel to help you sail through the process.

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ContractsCounsel is not a law firm, and this post should not be considered and does not contain legal advice. To ensure the information and advice in this post are correct, sufficient, and appropriate for your situation, please consult a licensed attorney. Also, using or accessing ContractsCounsel's site does not create an attorney-client relationship between you and ContractsCounsel.


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Multi-Member LLC

Ohio

Asked on Jun 22, 2024

Can you explain the process and requirements for forming a multi-member LLC?

I am currently in the process of starting a new business with two partners, and we have decided to form a multi-member LLC. We have a general understanding of what an LLC is and how it offers liability protection, but we are unsure about the specific steps and requirements involved in forming a multi-member LLC. We would like to know about the necessary documents, filing procedures, and any other legal considerations that we should be aware of in order to properly establish our LLC and protect our interests.

Paul S.

Answered Jul 12, 2024

You will need to file articles of organization with the Secretary of State of the state where you want to form the LLC. This is relatively easy. More importantly, because you will have 2 or more members, you should have an operating agreement. This is a contract between the members, detailing who the members are, what percentages of the LLC each member owns, how the LLC will be managed, how profits and losses will be allocated, and how distributions will be allocated. The operating agreement should also put restrictions on voluntary and involuntary (think divorce, death, bankruptcy) transfers of ownership, so that you don't suddenly end up with a new member that you don't want. The operating agreement is not filed with the state. You should have an experienced lawyer help you with the operating agreement, as it can be pretty complex.

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