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 MMLLC structure is allowed in every state in the U.S.

  1. 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.
  2. 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.
  3. 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.
  4. 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

Since there is no tax category specifically for an MMLLC, 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.

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