LLC Principal: Everything You Need to Know
An LLC principal or principal member, also called the responsible party, is a person who has been authorized by the LLC to act on its behalf in legal and tax matters. 3 min read
An LLC principal or principal member, also called the responsible party, is a person who has been authorized by the LLC to act on its behalf in legal and tax matters. Such a person usually has financial and decision-making powers on behalf of the LLC.
For multi-member LLCs, the principal is normally the member with the biggest ownership interest in the LLC. Other multi-member LLCs can designate one of the members as the principal. For single-member LLCs, the owner is generally the principal while the top manager of a manager-managed LLC may be the principal of that LLC.
An LLC is an entity type formed at the state level by filing a document called the "articles of organization." LLCs are flow-through businesses, meaning that any profits or losses of those businesses are redirected to the owners. The LLC does not pay corporate tax. Rather, it is the individual owners of the business who pay taxes on their share of income from the LLC.
LLCs are, however, obligated to withhold and forward payroll taxes from their employees or employee-owners. The IRS and state tax authorities need a way to uniquely identify and communicate with LLCs. The IRS thus assigns a nine-digit Employer Identification Number to all entities. This number acts as a unique identifier for the LLC.
For multi-member businesses, the IRS also requires that those businesses choose a person who will correspond with the IRS on behalf of the other members.
Why the Government Needs to Know the Principal of Your LLC
On some federal and state governments forms, the principal of an LLC normally refers to a member with authority and financial say regarding the affairs of the LLC. The name of the principal member of the LLC may be required on such forms, such as the Employer Identification Number application or Form SS-4 and the Change of Address or Responsible Party-Business or Form 8822-B.
The principal is normally the person with whom the tax authorities correspond about matters pertaining to the LLC. In multi-member businesses, the principal is the point person with whom authorities can communicate about the business.
How to Identify the Principal Member of the LLC
Although it is normally assumed that the member with the biggest financial stake in the LLC is the principal, to avoid confusion, it is a good practice for each LLC to choose its principal regardless of financial stake. This can ideally be done before drafting an operating agreement so that the principal member can be specified in the agreement. This practice is especially useful in manager-managed LLCs or LLCs whose members have an equal number of shares.
In the event of the death or incapacitation of the principal of the LLC, the IRS should be notified about the change of the principal of the business using Form 8822-B, Change of Address or Responsible Party - Business.
Requirements for a Person to Be a Principal of an LLC
The IRS sets qualifications for a principal of any entity. These are:
- The principal must be at least 18 years old.
- The principal must be a U.S. resident or legal permanent resident of the United States.
- The person must submit fingerprints to the IRS.
- The principal must meet all local and state licensing and bonding requirements for the preparation of tax returns.
- If the person is part of a professional body, they must have a valid license and be in good standing with the body.
Responsibilities of the LLC's Principal
The principal of an LLC may have a number of responsibilities, including:
- Signing documents: Some LLC tax documents must be signed by the LLC's principal. These documents include annual filings and tax filings.
- Receiving correspondence: The principal is the point person who will receive mail on behalf of the LLC. It is the principal's responsibility to forward the mail to other member or to tell them about the correspondence.
- Handling client relationships: The principal is normally the face of the LLC and is responsible for handling business-customer relationships. They bridge the gap between the company and lenders, tax authorities, customers, and suppliers.
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