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What is a Multi-Member LLC?
A multi-member LLC, also called a 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.
- 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.
- Because an SMLCC 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.
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.
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 .
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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.
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.
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.
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