Single-Member LLC vs Multi-Member LLC: What You Need to Know
To define a single-member LLC versus a multi-member LLC, a single-member LLC is owned by one person, whereas a multi-member LLC (MMLLC) has at least two owners.6 min read
2. How Does an LLC Operate?
3. Benefits of an LLC
4. Taxes for a Single-Member LLC
5. Taxes for a Multi-Member LLC (MM LLC)
6. Difference Between Single-Member and Multi-Member LLCs
7. Bankruptcy Protection for LLCs
To define a single-member LLC versus a multi-member LLC, a single-member LLC is owned by one person, whereas a multi-member LLC (MMLLC) has at least two owners. In an MMLLC, the members can be individuals or other companies. There is no limit on how many owners an MMLLC can have. Most commonly, you find spouses, friends, and business partners coming together to form an MMLLC.
What Is an LLC?
A limited liability company (LLC) is a business structure that provides the owner(s) with protection from liability similar to that of a corporation. The LLC is a legal entity separate from the owner. This type of company usually begins as a sole proprietorship or partnership and grows into an LLC. The owners of an LLC, whether single- or multi-member, may or may not be citizens and/or residents of the U.S.
How Does an LLC Operate?
Both single and multi-member LLCs are governed by state law, so requirements vary depending on your location. However, the MM LLC structure is allowed in every state in the U.S.
- The first step in forming an LLC is to file articles of organization, which may have a different name from place to place, with the secretary of state in the state where you want to do business.
- Once approved by the state, the business obtains an Employer Identification Number (EIN) directly from the IRS. This becomes the identifying number of the company for bank accounts, tax filings, payroll, and other legal documents. Getting an EIN can be done online in just a few minutes, and it's free.
- While it's not a legal requirement, it's wise for an LLC to have a written operating agreement. This is especially important in a multi-member LLC because it spells out the rights and responsibilities of each member. If a member wants to leave, dies, or has to be removed, this document lays out the process for how that happens.
- The operating agreement also defines how each member contributes to the business and how he or she gets paid. When the MMLLC is formed, each owner makes a capital contribution to the bank account in proportion to their membership interest, which is how much of the business they own. When the business realizes a profit, payments are made to the owners according to the operating agreement through capital distributions based on the member's membership interest.
Benefits of an LLC
Business owners may choose to organize as an LLC in order to protect their personal assets. If the business goes bankrupt, loses a lawsuit, or goes into debt, the LLC structure insures, in most cases, that the owners' personally held cash, property, and other assets can't be seized to pay the business liabilities. This is true for both single- and multi-member LLCs.
Taxes for a Single-Member LLC
The IRS considers single-member LLCs as disregarded entities, equivalent to sole proprietorships, and taxes them that way. Profits and losses are reported on a Schedule C that becomes part of the individual owner's tax return.
If a single-member LLC provides services or sells goods, the owner must pay self-employment taxes on the profits, using IRS Schedule SE. This is not required if the LLC is a passive business, like rental property. Profits for a passive type of business are reported on Schedule E, Supplemental Income and Loss. Remember that even if you don't take the profits from the business home with you, they are still taxable each year.
Taxes for a Multi-Member LLC (MM LLC)
Since there is no tax category specifically for an MM LLC, the IRS taxes these companies like partnerships using Form 1065, which is an informational return. Each member receives a K-1 form at tax time. The K-1 becomes part of the owner's individual tax return, showing the loss or profit from his or her involvement in the LLC.
Though this is the default, the company can choose to be taxed as an S-corp as long as it doesn't have more than 100 owners, referred to as shareholders. Those shareholders cannot be non-resident aliens. To make this election, use IRS Form 2553. You can also choose to be taxed as a C-corp using Form 8832.
Companies that elect to be taxed as an S-corp will pay a reasonable salary to each member, along with the appropriate payroll taxes. Then the LLC files Form 1120S, a corporate tax return, each year.
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
- DIFFERENCES BETWEEN PARTNERSHIP AND LLC - LLCs are technically considered a partnership structure. However, they have grown in popularity because of the limited liability protection 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.
- RULES - 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 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 company.
- OPERATING AGREEMENT - 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 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
- TAXES - 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.
Bankruptcy Protection for LLCs
Single-member and multi-member LLCs typically provide about the same level of protection of their member's personal assets from the LLC's liabilities. However, the same cannot be said when it comes to protecting the LLC from any personal liabilities.
In general, the seizure of assets cannot extend to the company assets without consent from other LLC members in a multi-member LLC. The reason for this is because it could result in the court taking one member's assets as a result of another member's own bankruptcy. However, where the LLC is a single-member LLC, the court could potentially view any company assets as one and the same with the owner assets. Anything valuable owned by the company could potentially be seized in order to sell the item to pay the owner's personal debt.
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