Members of LLC: Everything You Need to Know
Members of LLCs are the owners of the company in the Limited Liability Company business structure.2 min read
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 incorporation-llc-template">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.