What is a Multi-Member LLC & How Does it Work?
If you intend to launch a business, there are several options that you may choose to structure the entity. A multiple-member limited liability company provides several benefits worth considering.
As a Mergers and Acquisitions specialist, I assisted several businesses and entrepreneurs with LLC formation and maintenance.
After consulting our team of business experts, we’ll share our insights regarding the formation, management, taxation, and benefits of creating one.
Quick Summary
- A multi-member LLC is a business structure that features personal asset protection, pass-through taxation, and flexibility in management and operations.
- Essentially, a multi-member LLC functions through pooled capital, expertise, and labor which positively contribute to the assets of the company.
- According to the U.S. Small Business Administration, there are roughly 21.6 million LLCs in the United States, and approximately 1.7 million traditional C-Corporations
- Before deciding on which entity or structure to adapt, l advise entrepreneurs to identify their business goals, since it is the most important consideration.
What is a Multi-Member LLC?
A multi-member LLC is a business structure that features personal asset protection, pass-through taxation, and flexible management and operations.
The business entity is owned by several individuals called members, who each have an ownership interest in the company.
Multi-member LLCs are taxed as a partnership by default, but the members can opt for the company to be taxed as a C corp or S corp.
A 2024 report by the U.S. Small Business Administration (SBA) estimates that multi-member LLCs account for roughly 65% of all LLC formations in the US.
How Does a Multi-Member LLC Work?
A multi-member LLC works through pooled capital, expertise, and labor.
1. Pooling of Capital/Resources
The main advantage of having multiple partners when forming a business entity is capital contribution.
I inform clients that the presence of multiple members means that the LLC has access to more financial resources, which translates into faster growth and expansion.
2. Diverse Expertise
Members with business expertise can contribute personal insights and perspectives that can help the company succeed and grow.
LLC members who are also professionals can offer their skills in their respective fields. Lawyers, accountants, real estate agents or investment brokers can provide invaluable input into the company.
3. Division of labor and responsibilities
The members may be assigned definitive roles and responsibilities to distribute the workload associated with running the business.
An operating agreement will clearly define the role of each member, either in management, day-to-day operations, or any other aspect of the business.
4. Expanded Network
Each member of the LLC has their own personal circle of associates, which may be tapped as potential clients for the company.
In my experience, we had a significant increase in the client base through direct introductions or referrals, which positively impacted the business.
"A partnership is not a legal contract between two equal individuals. It’s an emotional alliance between two people committed to each other’s success."
- Jon Morgan, CEO, Co-Founder & Editor-in-Chief of Venture Smarter
What Are the Benefits of a Multi-Member LLC?
The benefits of a multi-member LLC include limited liability protection, taxation, flexible management, simple operating structure, and ease of formation.
- Personal asset protection: A limited liability company is legally treated as an independent entity separate from its members; as such, it provides limited liability protection. The members are not personally liable for the company’s debts and obligations [1].
- Tax benefits: LLCs benefit from pass-through taxation, wherein the business entity is not taxed at the corporate level. Instead, the taxes flow through, are reported, and paid on the individual returns of each member.
- Flexible management: The owners can appoint a qualified member or employ a professional service to act as the company’s manager. For new business owners, I advise them to hire an experienced individual in the first year of operation to familiarize themselves with the responsibilities of the position.
- Simple operating structure: A limited liability company is less structured and operates with fewer compliance requirements. Unlike a corporation, an LLC does not need to have a board of directors and is not required to conduct regular meetings.
- Ease of formation: Compared to a typical corporation, an LLC is relatively easier and less expensive to form. The company is only required to file Articles of Organization and appoint a registered agent in order to operate.
Multi-Member LLC Articles of Organization
Before it can become a legal entity, a multi-member LLC has to file Articles of Organization with the Secretary of State. It is a public document that contains all the important information about your LLC.
The Articles will contain:
- The name of the LLC or DBA
- Business address
- Date of formation
- LLC purpose
- Name and address of each member
- Registered agent information
The Articles of Organization will also specify whether your business will be a member-managed LLC or a manager-managed LLC.
Multi-Member LLC Operating Agreement
The operating agreement is an internal document that outlines the general management structure, distribution of profits and losses, voting requirements, and dissolution procedure.
Although most states do not require LLCs to file an operating agreement, I ensure that my clients draft one to clearly outline how the company operates.
In the absence of an operating agreement, state laws automatically apply.
There are free templates available online, but it's always the best idea to consult with a lawyer for guidance.
FAQs
Does a Multi-Member LLC Need an EIN?
A multi-member LLC needs an EIN for opening a business bank account, obtaining loans, hiring employees, and filing taxes – if the company opt to be taxed as a corporation.
Can a Multi-Member LLC Be Taxed as an S Corp?
A multi-member LLC can be taxed as an S corp by filing Form 2553, Election by a Small Business Corporation, with the Internal Revenue Service.
Do All Members in LLC Need a Professional License?
All members in an LLC need a professional license if you operate a Professional LLC. Although in some states, only a certain percentage of the members are required to have a license.
References:
- https://www.flblaw.com/is-it-time-to-think-about-an-llc-for-your-business/
