LLC Formation

An LLC can be a member of an LLC. Most state laws provide a range of options for LLC members or "persons" including individuals and business entities. 

If you want to form an LLC you must contact the Secretary of State (SOS) in your state and file articles of organization.

Operating agreements are not always required by the SOS, but they are a good idea when starting any business to help ensure smooth operations. These are written agreements that lay out the plans for the company, responsibilities of members, and plans to handle any major issues. 

Who Makes Up the Members of an LLC?

These are the following member types permitted for LLCs in most states:

  • State and non-state residents.
  • Citizens and non-citizens of the United States.
  • Corporations.
  • Other LLCs.
  • Trusts.
  • Pension plans.
  • Estates.

S Corporations (S Corps) are more limited in their member requirements as their members must be individuals who are citizens of the United States, and they may not have business entities as members. 

Members of an LLC are listed in the company's operating agreement. 

Member rights and responsibilities will also be outlined in the operating agreement. It should clarify rules for profit sharing, management, and the handling of company losses. 

The members of an LLC may be divided into different classes based on rights and responsibilities. Some classes might have more say in the decisions regarding the company, while others might be more involved in the day-to-day operations. 

Single-member LLCs will have very basic operating agreements as the profits, losses, and responsibilities fall to the one, individual owner. All LLCs must have a minimum of one member in order to be formed. 

Some ways that an LLC might be structured include:

  • A few family members starting a family business.
  • Friends beginning some type of business enterprise.
  • An individual acting as managing member with other members joining under them.
  • A partnership between two members, like a real estate mogul and an accountant.

LLC members can have indirect ownership in the company if there are two LLCs with members under a larger, parent LLC. The members of the subsidiary LLCs have indirect ownership in the parent LLC.

LLC members can also be groups. If a group of people has ownership in an LLC and they have a representative, that individual might be responsible for decisions in the company, but the group as a whole maintains ownership.

LLC Member Duties

Membership duties should be clearly spelled out in the LLC's articles of organization and operating agreement. These should also include membership rights, voting rules, and powers. If the voting rules are not addressed in the operating agreement, the state will usually have default rules laid out. 

Managers can be members of the LLC, but they can also be individuals who are hired separately. Limited partnerships do not allow members to act as managers in the company. When an LLC member acts as a manager, they do not lose their protection from liabilities. 

LLC Tax Issues

Many business owners choose to use the LLC structure for their business in order to benefit from the pass-through characteristic when it comes to taxes

All profits and losses experienced by the company pass through to the LLC members. Therefore, profits are not taxed as company income, but they are only taxed once as the personal income of the members on their federal income taxes. 

LLC Liability Protection

If an LLC is subject to a lawsuit or files for bankruptcy, the members of the company are protected from financial and legal responsibility. This protection helps LLCs gain more investors as there is less of a risk than with other company structures. 

LLC Management

LLCs can be either member-managed or manager-managed. 

When the members or owners are responsible for the day-to-day operations for the business, this is a member-managed structure. 

When the member or owners of an LLC hire a third-party to handle the regular business operations, this is a manager-managed structure. 

Typically single-member LLCs are member-managed because the individual owner just takes cares of all daily operations. 

Larger, multi-member LLCs usually hire a manager or appoint a member to act as manager, because there are too many investors to allow all members to be involved in regular decisions and operations. 

If you need help with making an LLC a member of an LLC, you can post your legal need on UpCounsel's marketplace. UpCounsel accepts only the top 5 percent of lawyers to its site. Lawyers on UpCounsel come from law schools such as Harvard Law and Yale Law and average 14 years of legal experience, including work with or on behalf of companies like Google, Stripe, and Twilio.