Multi Member LLC vs Single Member LLC
Deciding on a multi member LLC vs single member LLC is an important step when thinking a business you want to form, number of members and how you'll be taxed.4 min read
Deciding on a multi member LLC vs single member LLC is an important step when deciding what kind of business you want to form, how many members will be involved, and how you want to be taxed.
Multi-Member LLC Definition
A multi-member LLC, or MMLLC for short, is a limited liability company that has two members or more. There is no limit regarding how many members a multi-member LLC can have. Members of a multi-member LLC can be any of the following:
- A corporation
- Another LLC
The one exception to this is that, if an LLC chooses to be taxed by the IRS as an S-corporation, it can't have more than 100 members. In addition to this, no member can be a resident-alien in a multi-member LLC that is taxed as an S-corporation. The main reason for forming a multi-member LLC is to offer members a measure of protection for their personal assets. That is, the primary function of a limited liability company is to limit each member's exposure to liability in the event that the company faces legal action.
Multi-member LLCs are most popular among:
- Husband and wife business teams
- Friends going into business with each other
- Business partners setting out on a joint venture
Every state in the United States allows for the formation of multi-member LLCs. They can be formed by:
- U.S. citizens
- Non-U.S. citizens
- Non-U.S. residents
This is also true for single-member LLCs.
Difference Between Single-Member and Multi-Member LLCs
Limited liability companies are a specific type of business structure that provides limited liability protection for its members, similar to the way a corporation protects its owners and shareholders. In recent years, the formation of LLCs has risen to become one of the most popular business structures among:
- Startup companies
- Small business owners
- New business ventures
LLCs are technically considered a partnership structure. However, they have grown in popularity because of the limited liability protections they offer. In addition to these protections, LLCs maintain many of the attributes that are common in partnerships. The main difference between a partnership and an LLC is:
- Partnerships are formed between two or more people
- Forming an LLC requires only one person
- LLCs offer limited liability protections that partnerships don't
Many of these sole individuals choose to form as an LLC because of the fact they believe the liability protections the structure offers will be beneficial, both on a personal and a business level.
The specific rules that govern single-member and multi-member LLCs will vary from one state to the next. There are, however, some general rules that can help when deciding whether you and a business partner should be listed together as members of your LLC. This decision should include more than simply considering how many people are involved in the company. There are strengths and weaknesses associated with both options and, because of these, it is not uncommon for:
- A single person to form a multi-member LLC
- A company with several people involved to form a single-member LLC
It all depends on what is most important to your business and to you as its owners. A single person wanting to form a multi-member LLC for the asset protection it would offer, for example, might choose to make one of the following a member of the company as well:
Or, if two people who own multiple properties under separate LLCs want to combine them, they could form one multi-member LLC and list the other single-member LLCs as members of the new company. In this way, they can avoid having to file a separate tax return for each individual company.
Whether you form a multi-member or single-member LLC, you're going to have an operating agreement in place. For multi-member LLCs, however, you're going to have to be more careful when it comes to providing details pertaining to the rights of each individual member to prevent issues in the event of:
- A member's withdrawal
- The company splitting up
- Death of a member
- A disagreement that can't be reconciled
Single-member LLCs are easier to handle when it comes to taxes because they are not required to file a federal tax return. The exception to this is when a single-member LLC opts to be taxed as a corporation. Instead, income is reported on each member's personal tax return.
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