Two Member LLC: Everything You Need to Know
A two-member LLC is a multi-member limited liability company that protects its members' personal assets.3 min read
A two-member LLC is a multi-member limited liability company that protects its members' personal assets. Many business owners form LLCs because this structure has fewer ownership restrictions and protects their personal assets from business liabilities. The most popular types of two-members LLCs are businesses run by a husband and wife or businesses with friends as partners. A multi-member LLC can be formed in all 50 states and can have as many owners as needed unless it chooses to form as an S corporation, which would limit the number of owners to 100.
Taxes in Multi-Member LLCs
The IRS treats multi-member LLCs the same as partnerships. When filing taxes, a multi-member LLC must file a Form 1065 Partnership Return. This is an informational return only, as the tax liability will pass to the individual members on their personal tax returns. Each member in a multi-member LLC is given a K-1, which provides a report on each member's profits and losses. The K-1 then becomes part of each member's personal tax returns.
While a multi-member LLC is taxed like a partnership, it is not technically a partnership in regard to its classification or structure. An LLC is a completely different tax entity than a partnership and only uses the tax structure of a partnership because the IRS has not created a tax designation for LLCs. You can choose to have your LLC taxed as an S corporation by filing Form 2553 with the IRS to change your classification.
You can also choose to have your LLC treated as a C corporation for tax purposes by filing Form 8832 with the IRS. If you are unsure which tax designation is best for you, discuss your situation with a couple of accountants to determine the appropriate option for your business.
For payments in an LLC, each member will receive what is referred to as a capital distribution. These are paid via check from the business bank account. Distribution is based on the percentage of each member's LLC ownership. If you elect for S corporation taxation status, each of the owners will need to draw what is considered a reasonable salary. The S corporation should then file Form 1120S with the IRS.
Can You Get an Employer Identification Number for Your LLC?
Once your multi-member LLC has been approved, you will be able to obtain what is known as an EIN, or employer identification number, which will serve as your company's identification number. An EIN is important to have when:
- Filing tax returns
- Opening business banking accounts
- Processing employee payroll
Employer identification numbers are available from the IRS for free and can be obtained by filling out an online form.
How to Form a Multi-Member LLC
Forming a multi-member LLC is relatively simple and involves only a few steps. To form as an LLC, you must file your company's Articles of Organization with your state's Secretary of State office. Depending on the state in which you are filing, your articles might also be referred to as:
- Certificate of Organization
- Certificate of Formation
Why Should a Multi-Member LLC Have an Operating Agreement?
When an LLC has multiple owners — particularly ones that aren't involved in the company's daily operation — it is advisable to form an Operating Agreement. This is because sometimes members fall out of favor with each other or the business fails.
A company Operating Agreement will help:
- Outline the management of the day-to-day business functions.
- Outline member rights and responsibilities to prevent disputes.
- Provide instructions for the transfer of ownership or events that would lead to a dissolution.
You will also want to include member-specific information in your Operating Agreement. This serves as a public record of all previously agreed-upon information. Operating Agreement member sections should include:
- How much money each member has put into the LLC.
- Whether members are required to make continued contributions.
- The cash value of member investments that were not cash.
- Each owner's percentage of ownership.
- How members can buy out interest from a member that's leaving.
- How a member's interest will be valued when they leave.
- Procedures done when a member wants to leave.
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