What Is a Single-Member vs. Multi-Member LLC?
A single-member vs. multi-member LLC is different in that a single-member LLC contains only one member while a multi-member LLC contains two or more members.4 min read
2. Single-Member LLCs and Multi-Member LLCs
3. Single-Member or Multiple-Member LLC Taxes
4. Bankruptcy Protection for LLCs
A single-member vs. multi-member LLC is different in that a single-member LLC contains only one member while a multi-member LLC contains two or more members.
What Is an LLC?
A limited liability company (LLC) is a business that operates like a partnership but has the benefit of added liability protection. While it operates similarly to a partnership, it is not legally a partnership, and it is just treated this way for tax purposes. Additionally, an LLC provides much of the same liability protection for the owners of the LLC as a corporation would, though an LLC is not actually a corporation.
There is not a specific tax classification by the IRS for LLCs, so under the IRS rules, a multi-member LLC is taxed like a partnership because there are multiple owners. You do have the option to have a multi-member LLC taxed as either an S-Corporation or a C-Corporation. If you choose to have the LLC taxed as an S-Corporation, you will need to complete and file a Form 2553 and submit the form to the IRS. If you elect to have the LLC taxed as a C-Corporation, you will need to complete and file a Form 8832 and submit the form to the IRS.
Single-Member LLCs and Multi-Member LLCs
Whether or not a single-member or multiple-member LLC is formed goes beyond just the number of people included in the LLC. Since there are advantages and disadvantages to each type of LLC, there are situations in which a single business owner will decide it is best to form a multiple-member LLC and also situations in which multiple people might decide it is best to form a single-member LLC.
Someone with a one-person business may decide to form a multiple-member LLC in order to get the benefit of asset protection, so they may elect to make their spouse, child, or parent a member of the newly-formed LLC. Additionally, two or more people who own multiple properties operating as separate LLCs may decide to make them all single-member LLCs, which are owned by one multiple-member LLC in order to avoid having to file a separate tax return for each business.
Single-Member or Multiple-Member LLC Taxes
For tax purposes, a single-member LLC is the easier business form because a single-member LLC does not have to file a federal tax return (unless for tax purposes, the business has decided to be treated as a corporation). Any income would be reported on that member's own tax return.
When it comes to multiple-member LLCs, these companies must file a tax return, and then it is also required that the members complete K-1 forms to file with their taxes. Corporate income in the United States is typically double-taxed, meaning that both the shareholders and the company must pay income tax. For LLCs, the only income taxed is on the owner's level. Therefore, on the company level at least, there is no difference between single and multi-member LLCs for income taxation.
On a personal level, however, there may be a difference for taxation of personal income for married couples. This may occur if a married couple files separate tax returns. If only one of the spouses is an owner of the LLC, then the profits from that LLC could potentially place that spouse into a higher tax bracket, which would result in a higher tax rate. In the event both spouses are LLC owners or the married couple files a joint tax return with a single-member LLC, this tax problem may not happen.
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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