LLC Member: Everything You Need to Know
An LLC member is an owner of a Limited Liability Company (LLC). 4 min read
An LLC member is an owner of a Limited Liability Company (LLC). This is a relatively new type of business form that offers some liability protection, similar to a corporation, and the tax benefits of a partnership.
Important Facts About LLCs
An LLC is formed when you file Articles of Organization, or the equivalent, depending on what state you're in. LLC regulations are entirely at the state level; there is no federal involvement, including by the IRS. LLCs can have multiple classes of members. Each class may have different rights. One may have preferred rights for distributions versus those of another class. Another class may have decision-making rights while the other won't.
Other characteristics of LLCs:
- Each member is an owner, but unlike a corporation, there are no shares issued.
- The Operating Agreement sets forth the rights and responsibilities of the LLC members.
- An LLC can either be a single-member LLC or a multiple-member LLC.
- Both are run the same way, the designation just distinguishes how they are taxed.
Who Can Be an LLC Member?
States don't place too many restrictions on who can be an LLC member, but they must be at least 18 years of age or older. They are not required to be U.S. citizens. Many organizations, including corporations, S corporations, pension plans, and other LLCs, are eligible to be members of an LLC.
For Professional LLCs (PLLCs), it's pretty standard that members and their professional licenses must be presented for approval when the business is formed. If you have not heard of PLLCs, these must have owners who are licensed professionals in their respective fields. An example would be a group of attorneys who plan to practice law. Only other attorneys who are active members of that state's bar association can be a member.
If you have a single-member LLC, the IRS categorizes it by default as a sole proprietorship. The main difference is some liability protection with an LLC, otherwise, it's essentially the same as a sole proprietorship. Single-member LLC members cannot take a salary as the IRS treats all income as part of their personal income.
LLCs are popular business organizations because they offer the benefits of a corporation and partnership. They are owners, more like shareholders, but responsibility and rights are more like partners. Multi-member LLCs default to partnerships in the eyes of the IRS. All profits and losses pass through to the member and they report them on their personal income tax returns.
Passive members are akin to a limited partner. Their involvement is typically only the initial investment. They have no management rights, and they do take part when a full vote of members is required, like admitting a new member or electing a manager.
Deciding On Management Structure
Member-managed LLCs are the default in a number of states, so you only need to set forth the details if you want a manager-managed one when drafting your Operating Agreement. If members opt to manage the LLC by themselves, they can set it up as they see fit. There is no requirement to form a board of directors, but members should meet at least once a year and keep minutes of their decisions and discussions. Member-managed LLCs are responsible for managing day-to-day activities.
Power includes the ability to make decisions, including human resource decisions, like firing or promoting an employee. They can sign contracts, make purchases, and enter into legal contracts on behalf of the LLC. They do not appoint any non-members or third parties to make any LLC decisions. Only a member manager has the authority to sign IRS Form 1065, which is the Return of Partnership Income. This is more informational to show the IRS what annual distributions were.
If you opt for a manager-managed LLC, you must be specific in the Operating Agreement about this person's authority and rights. LLC managers are similar to a corporation's CEO. These are employees though, not members. Any authority to manage the LLC is expressly granted by its members.
Small businesses typically opt for member-managed LLCs, but there are certain business scenarios where a manager-managed LLC may make more sense. Examples where manager-managed LLCs are preferable include:
- Members who lack skill and experience or want to be passive investors.
- If a portion of members, or all the members, don't want to play an active role in the business.
- If there are too many owners, it can be difficult to share management with so many people.
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