Multi Member LLC
A multi member LLC is any limited liability company with two or more owners. While multi member LLCs share some similarities with single member LLCs and general partnerships, they have some significant differences as well. Read on and learn everything you need to know about multi member LLCs.
In this article:
What is a Multi Member LLC?
Multi Member LLC vs Single Member LLC
Multi Member LLC vs Partnership
Member-Managed LLC vs Manager-Managed LLC
Multi Member LLC FAQ
What is a Multi Member LLC?
Multi member LLCs are a type of LLC with more than one owner. The owners of an LLC are called members—hence the name “multi-member.” A multi member LLC can have an unlimited number of members—unless it elects S corp tax treatment, which will limit the LLC to a maximum of 100 members.
Multi Member LLC vs Single Member LLC
All LLCs, no matter how many members they have, share a few key characteristics:
- Formation: Forming an LLC is done on the state level by filing Articles of Organization.
- Registered agent requirements: LLCs must typically appoint and maintain a registered agent.
- Liability protections: LLCs have limited liability. The LLC has its own debts and assets, separate from its owners.
- Management options: The owner or owners can run the LLC or choose to appoint or hire managers instead.
- Tax options: LLCs can keep their default tax status or can file IRS paperwork to be taxed as an S-corp or C-corp.
However, there are a few key differences between multi member and single member LLCs (SMLLCs):
LLC taxes
Unless they opt to change their tax classification, single and multi member LLCs are taxed differently by the IRS and have different filing requirements:
- Multi member LLCs: By default, the IRS will tax your multi member LLC as a partnership. Each year, partnerships submit Form 1065, along with a Schedule K-1 for each member, to the IRS. Each member will also use their copy of their K-1 to populate Schedule E, which will then be attached to their own personal tax return (Form 1040).
- Single member LLCs: SMLLCs are considered disregarded entities by the IRS, which means you’ll need to report all profits and losses on a Schedule C tax form. You’ll submit Schedule C with your 1040 form. Typically pretty simple.
Liability protections
All LLCs have some degree of liability protection, but it’s often stronger for multi member LLCs. Why?
- Easier financial separation. Businesses can lose liability protections if there isn’t a clear separation between the business and its members. SMLLCs may find it more difficult to keep from co-mingling business and personal finances, especially if they don’t open a business bank account. Was that burrito you ordered a personal or business expense? With more members, there’s typically a clearer understanding what has been contributed to the business and what the business owes each member.
- Charging order limitations. If an owner of a multi member LLC gets in personal financial hot water, creditors can’t usually get much from the LLC. Creditors are typically limited to a charging order (which redirects any distributions from that member to the creditor). This leaves the other members—and the business—pretty well protected. While a few states, like Wyoming and Delaware, extend these same limitations to SMLLCs, many other states do not.
Multi Member LLC vs Partnership
Multi-member LLCs may share some key characteristics with partnerships, but there are also important differences. Not sure which business type is right for you? Check out our side-by-side comparison below.
|
Multi Member LLC |
General Partnership |
|
| Formation | Articles of Organization filed with the state. | No need to register your business with the state. |
| Reporting requirements | Must file any state compliance reports (such as annual reports) and pay state fees. | Partnerships aren’t required to file any annual or periodic reports with the state. |
| Liability | The members and the LLC are legally separate entities with separate liabilities. For instance, business debts and assets belong to the business, not the individual members. | Each owner is personally liable for the business’s debts and other liabilities. In some states, each partner can be held liable for another partner’s negligent behavior. |
| Owner title | An owner is called a member. | Owners are known as partners. |
| Ownership | Owners can be individuals, other LLCs, or corporations. | General partnerships have no restrictions on who can be owners, which means LLCs and corporations can be partners in a general partnership. |
| Management | The members can choose to make all business decisions or they can hire a manager to make all decisions. | Partners can agree to customize the management and operations of the partnership, and can specify different areas of responsibility and different privileges for each partner. |
| Tax options | Taxed as a partnership by default. Members also have the option to be taxed as a C-corp or S-corp. | Taxed as a partnership. A general partnership cannot change tax designation. |
Member-Managed LLC vs. Manager-Managed LLC
Single member LLCs don’t have to worry about sharing management responsibilities unless they want to, in which case they would hire one or more managers to run their business. In most cases though, a single member LLC acts as both the owner and the manager of the business. In a multi member LLC, however, the members choose how their business will be managed. They can choose either:
- Member-managed: In a member-managed LLC, all of the members participate in the daily operation of the business. Member-managed LLCs are more hands-on with regards to decision making because the owners of the business are directly responsible for the way in which the business operates.
- Manager-managed: In a manager-managed LLC, the members of the LLC appoint or hire one or more managers to deal with day-to-day operations of the business. The manager can be a member of the LLC who takes the reigns, or it can be a third party. In a manager-managed LLC, the non-managing members take a passive role in the business.
In most states, LLCs are considered member-managed by default. The management style is sometimes noted in state articles but is most commonly denoted with the LLC’s operating agreement, your LLC’s governing document.
Northwest offers free operating agreement templates, including a manager-managed LLC operating agreement and a regular multi-member LLC operating agreement.
Multi Member LLC FAQ
Multi member LLCs are required to obtain an EIN. Your EIN will help your multi member LLC open a business bank account, apply for loans and credit cards, provide 1099s to independent contractors, and most importantly, establish a clear line of separation between the business and its owners.
To get paid by the business, LLC members take money out of their share of the company’s profits. These profits are generally paid out in two ways: distributions or draws.
- Distributions are withdrawn from the LLC’s bank account, and are handed out according to each member’s percentage of ownership in the LLC, unless stated otherwise in the operating agreement. Distributions are often done at the end of the fiscal year.
- Draws are a more flexible option. LLC members can schedule draws, or take them as needed, depending on what has been laid out in the operating agreement. The total of these draws cannot exceed a member’s ownership percentage.
Still have questions? Check out our article on How to Pay Yourself with an LLC.
Yes. The LLC members can sell their full ownership interest to one member, thus making the single member of the LLC the sole owner. LLC members can also agree to sell their full ownership interests to a nonmember of the LLC. Some states will require the LLC to update its Articles of Organization, and you should definitely look at updating the operating agreement to reflect single member ownership. Beyond that, the process is pretty straightforward as long as the change is in compliance with the operating agreement.
Your multi member LLC is formed and dissolved at the state level. The first step of dissolution is to follow the rules set out in your operating agreement. In general, the LLC’s dissolution is triggered by a vote of the members. From there you’ll need to file Articles of Dissolution with the state agency that oversees business in your state. If your LLC doesn’t follow all the steps of dissolution, the business may continue to accrue state fees and taxes.
Learn how to dissolve your LLC in general and in your state.
