If you're an entrepreneur and would like to start a business, there's a question that will eventually come up:
Multi-member LLC vs. single-member LLC?
What do these terms mean?
Multi-member LLCs are more complicated than single-member LLCs because they involve multiple owners with different roles and responsibilities.
To help you make the decision, we've created this blog post covering the differences between multi-member and single-member LLCs.
What Is an LLC?
A limited liability company, or LLC, represents a business structure that provides personal asset protection.
It's a business entity that provides business owners with limited liability. LLCs are flexible and can be used for many different types of businesses because an LLC combines the features of other business entities, like corporations (C or S corporations) or partnerships.
An LLC is easy to set up. It's simpler than setting up a corporation because you don't need any meetings or stockholders at formation unless you want them; however, it has less flexibility than a partnership when it comes to taxation and management structure since members will not have access to corporate tax rates if they're taxed as individuals on their personal income taxes instead of pass-through taxation that partners would face in certain circumstances.
You should consult your accountant regarding whether forming an LLC makes sense for your particular situation.
What is a Single-Member LLC?
A single-member LLC is an LLC that has only one owner (a one-person business).
The business is classified as a disregarded entity for tax purposes, meaning the income and expenses are not reported on a separate tax return but instead flow through to its single member's personal tax return.
Single-member limited liability companies can be taxed in seven different ways:
- Sole proprietorship
- C Corporation
- S Corporations
A single-member LLC offers personal liability protection for business debts and lawsuits, in addition to the business tax savings of an LLC.
What is a Multi-Member LLC?
A multi-member LLC is a business structure that consists of two or more owners, where each member has personal assets that are protected by the LLC.
Multi-member LLCs have many benefits, including personal asset protection and tax reporting simplicity.
For example, if you start a multiple-member LLC to run your construction company with one other individual, any personal assets either of you owns would be safe from creditors trying to collect on debts incurred during the course of operating your construction business.
The same is true for taxable income--both members will report their share of the profits or losses on separate Schedule C forms attached to their personal Form-K reports.
Purpose & Goals: Single-Member LLC vs. Multi-Member LLC
A single-member LLC is a legal entity most commonly used by business owners with another full-time job or business. This type of taxation provides simplicity at both state and federal levels; however, it limits deductions related to employer contributions which may increase taxable income.
On the other hand, multiple-member LLCs are often taxed as partnerships with the operating agreement, which is an internal document that establishes the rules and regulations of how LLC's profits are divided among members.
Both types of LLCs provide limited liability protection to owners, but multi-member LLCs offer more benefits than single-member LLC because it allows for deductions on contributions made by partner businesses.
Multi-member LLCs are founded by business owners who want to work with other people and share profits.
The management structure, ownership, and some formation documents will differ depending on whether you're setting up a single-member or a multiple-member LLC.
Ownership & Investment
LLC members can be individuals, corporations, or even other LLCs. They are not required to take up the same role within an organization; members can serve as managers, members/managers, and passive investors depending on their needs.
LLC owners have a lot more freedom with how they manage their business compared to sole proprietorships or partnerships because there is no "outside" LLC owner that has invested capital into the company. Every member contributes financially in some way, whether it's through investment or management of day-to-day activities.
This allows for fewer limitations when making decisions about marketing plans and growth strategies since all parties involved have a say in what happens next.
Multi-member LLC ownership is different from that of a single-member LLC.
While both types of companies offer limited liability for the owners (members), other factors come into play when it comes to managing membership interests in an LLC, including who owns what percentage of the company, when and how members can sell their interest in the company to outside investors.
The "outside" owner that has invested capital into the company - every member contributes financially in some way whether it's through investment or management of day-to-day operations.
This allows for fewer limitations when making decisions about marketing plans and growth strategies.
Multi-member owners can elect to be taxed as a corporation, partnership, or sole proprietorship depending on the needs of their business and what makes sense for tax purposes.
This allows their liability protection to remain intact while changing ownership structure without having to dissolve the company and create it again under a new name/structure (which would require additional filing fees, etc.).
Single-member companies are treated as separate entities from their owner, so there's no need for an election when taxes come around - they're automatically considered "disregarded" in their tax classification, which means all profits and losses follow directly to the individual member, so there isn't any double taxation by including both personal income and business activity into a single tax return.
All LLCs pay self-employment taxes regardless of whether they're single- or multi-member LLCs.
Multi-member LLCs pay income tax on the business's profits, which means double taxation (again, like a sole proprietorship). However, if there are two or more members in an LLC that's taxed as a partnership, then each member must report their share of the company's income on their federal tax return.
LLCs can either be managed by their members or by managers.
In a member-managed LLC, all members have an equal say in decisions made for the company and are involved in the business OPERATIONS. In member-managed companies, each member has equal responsibility, which means that every member must agree on major decisions such as what type of product or service should be offered by the company unless otherwise specified in the operating agreement.
The management structure can also lead to personal liability if something goes wrong with one of your services or products because you will likely share ownership responsibilities together.
However, a manager-managed LLC designates someone who manages other people's money without being liable for any debts incurred from doing so. This person does not necessarily need to be a member of the LLC and can be someone outside.
An LLC operating agreement is a contract between the members of an LLC that outlines how they will function together.
The operating agreement dictates each member's rights when profits should be distributed to the members and when membership interest in the company may be transferred or bought out by other individuals or groups.
An important part of any business is finding ways to keep personal matters separate from professional ones.
It often makes good sense for an LLC with multiple owners (or managers) to have some kind of formalized legal document outlining their ownership arrangement - this is called an "operating agreement."
Operating Agreements go beyond just stating that you're in business together; it spells out exactly who does what, how much everyone gets paid, where revenue goes once it's earned etc.
A single-member LLC will also need an operating agreement, but if it's the only business owner, an operating agreement is basically used as a contract to outline all of the terms and conditions for owning and running your own LLC. It can be drafted with or without lawyers, but it's always worth hiring one who may have experience in this area.
Can a Single-Member LLC Have Two Members?
No. A single-member LLC can only have one member, but it can convert to a multi-member.
Does Every LLC Need a Separate Bank Account?
Although the state law of every US state doesn't require LLC to have a separate bank account, both single-member and multiple-member LLCs should have one. In addition, having separate bank accounts will make it easier to manage your LLC's assets, business profits and protect owners' personal property.
Does a Single-Member LLC Need a New Ein When Becoming a Multi-Member LLC?
A new EIN is needed whenever LLC a single-member LLC is formed and elects corporate tax treatment.
How Do I Change from Single-Member LLC to Multi-Member LLC?
You can add a member to your LLC by filing an amendment to your Articles of Organization and changing your operating agreement. Depending on your state laws, the procedures may vary.
It's important to consider what type of business you are running and the possibilities for your company in order to decide if a single-member or multi-member LLC is right for you.
Some businesses may have an easier time with one structure, while others will be better suited to another.
The decision can't always come down to simply choosing whichever structure has fewer steps involved--you need to look at how it impacts your ability to do business as well.