Key Takeaways

  • A member of an LLC is an individual or entity that owns part of the LLC.
  • Members can be individuals, corporations, other LLCs, or foreign entities, depending on state laws.
  • Members may participate in management directly (member-managed) or appoint managers (manager-managed).
  • Membership rights, responsibilities, and profit-sharing are typically defined in the LLC’s Operating Agreement.
  • LLCs may have different classes of membership with varying rights and privileges.
  • Adding or removing members usually requires compliance with the Operating Agreement and state regulations.
  • Members receive pass-through tax treatment but do not receive traditional salaries.
  • Foreign individuals and entities can often be LLC members, though there may be restrictions on S Corporation election.

Members of LLCs are the owners of the company in the Limited Liability Company business structure.

Who Is a Member of a Limited Liability Company?

 Rather than partners or shareholders, an LLC refers to owners as members. This type of business structure does not have ownership shares like a corporation does. LLC members are the legal owners of the company, similar to the way owners are considered members in a partnership business structure. The rights and obligations of the members in an LLC are outlined in the company's Operating Agreement, as well as local state law.

Depending on the size of your company and its specific structure, LLC members can be any of the following:  

  • A sole proprietor  
  • A partner  
  • A silent investor

LLC members have interests in the company that can be associated with certain legal rights, such as:  

  • Sharing of the company's profits and losses  
  • Receiving financial distributions from the LLC  
  • Participating in the daily management of the business

A Limited Liability Company is typically formed by filing documents known as Articles of Organization with your local Secretary of State. Because the LLC business structure is formed at the state level, federal agencies, such as the Internal Revenue Service, are not involved in the process of incorporation. 

A Limited Liability Company may have multiple types of members. A member's rights may vary, depending on what type of member they are classified as within the company. One type of member, for example, may have rights to claim distributions from the company over another member type. Whereas, another member type may have management rights that other members can't claim.

Depending on how many members are involved in a Limited Liability Company, the business may be classified under one of two different membership types:  

  • A single-member LLC  
  • A multiple-member LLC

While there is no difference in how these two membership classifications are run, they are taxed differently. By default, the IRS regards single-member LLCs as sole proprietorships for taxation purposes. This is because, aside from the limited liability protection of the LLC structure, the member of a single-member Limited Liability Structure is basically the same as a sole proprietor. A single member is not able to draw a salary from the company. This is because the Internal Revenue Service considers all of the company's profits to be a part of the member's personal income. Taxes are collected on a self-employment basis, rather than taxing the company as a separate entity.

A multiple-member LLC differs from a single-member LLC in that it is classified as a partnership by the IRS. The Internal Revenue Service also considers all members of a multiple-membership LLC to be the same as partners. In this case, all of the company's profits and losses pass through the company to the members' personal tax returns. However, members have the option to share profits in a manner that is disproportionate to a member's initial investment. This makes it possible to issue greater shares to members who are more actively involved in the daily operations of the company. Members of a multiple-member LLC are also not able to receive a salary.

What Types of Entities Can Be LLC Members?

LLC members can be a wide range of individuals or entities, subject to the laws of the state where the LLC is formed. Common types of LLC members include:

  • U.S. citizens or residents
  • Non-U.S. citizens or non-resident aliens (unless electing S Corporation status)
  • Other LLCs
  • Corporations (C Corps or S Corps)
  • Trusts
  • Partnerships

However, some restrictions may apply. For example, if the LLC chooses to be taxed as an S Corporation, only eligible individuals and certain trusts or estates may be members—non-resident aliens and many entity types would be excluded.

Member-Managed vs. Manager-Managed LLCs

An LLC may be structured as either member-managed or manager-managed:

  • Member-Managed LLC: All members actively participate in the day-to-day operations and decision-making.
  • Manager-Managed LLC: Members appoint one or more managers to handle daily operations, while retaining ownership rights without direct involvement in management.

The chosen structure should be documented in the LLC’s Articles of Organization and Operating Agreement. The management style affects voting rights, authority to bind the company, and decision-making processes.

Rights and Responsibilities of LLC Members

LLC members typically have the following rights and responsibilities:

  • Voting on major business decisions, such as admitting new members or dissolving the company
  • Receiving a share of the profits and losses according to the Operating Agreement
  • Accessing company financial records and information
  • Contributing capital to the business
  • Maintaining limited liability protection against company debts and lawsuits (unless personally guaranteed)

The Operating Agreement is the key document that outlines these rights and any limitations, including whether certain members have voting privileges or passive roles.

Membership Interest and Profit Sharing

A member’s ownership in an LLC is referred to as their membership interest. This interest can be divided into:

  • Capital interest: The member’s share of the LLC’s capital contributions.
  • Profit interest: The share of future profits and losses.

Unlike corporations that issue stock, LLC membership interest is not represented by shares but is defined in the Operating Agreement. Importantly, profit distribution does not always have to match initial capital contributions—LLC members may agree to allocate profits disproportionately based on effort, contribution, or other factors.

Can LLC Members Be Employees?

In most cases, LLC members cannot be classified as employees and do not receive wages or salaries in the traditional sense. Instead, members receive distributions based on the LLC’s profits. However, members who perform substantial services for the LLC may receive guaranteed payments, which are payments made regardless of profit.

It’s important to distinguish between:

  • Distributions: Earnings passed through to members, typically taxed as self-employment income.
  • Guaranteed payments: Fixed payments to members for services rendered, also subject to self-employment tax.

How to Add or Remove LLC Members

The process of adding or removing LLC members should follow the terms outlined in the Operating Agreement and comply with state law. Typical steps include:

  • Obtaining consent from existing members (often requiring unanimous or majority approval)
  • Amending the Operating Agreement to reflect changes
  • Filing necessary amendments with the state, if required
  • Updating tax records and notifying the IRS if there is a change in tax classification

Failure to properly document membership changes can lead to disputes and legal complications.

Frequently Asked Questions

  1. What is a member of an LLC?
    A member of an LLC is an individual or entity that holds ownership interest in the company. Members can be involved in management or act as passive investors, depending on the LLC’s structure.
  2. Can an LLC have non-U.S. citizen members?
    Yes, many states allow non-U.S. citizens and non-residents to be members of an LLC. However, if the LLC elects S Corporation status, non-resident aliens cannot be members.
  3. What is the difference between a member and a manager in an LLC?
    A member is an owner of the LLC, while a manager is responsible for running the company’s day-to-day operations. In a member-managed LLC, members act as managers. In a manager-managed LLC, members appoint managers to handle operations.
  4. How do LLC members get paid?
    LLC members typically receive profits through distributions, not traditional salaries. Some may also receive guaranteed payments for services rendered, which are subject to self-employment taxes.
  5. How can LLC membership be transferred?
    Membership interests can usually be transferred only with the consent of the other members, as outlined in the Operating Agreement. Transfers may require amending company documents and notifying the state or IRS in some cases.

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