What Is a Multi-Member LLC?

If you’re forming a limited liability company (LLC) with one or more partners, you’ll be forming a multi-member LLC, as LLC owners are called members. LLCs offer many benefits, whether with a single member or multiple members.

Formation of Multi-member LLCs

Process of Formation

The formation of a Multi-member LLC begins with choosing a business name that is unique and complies with state regulations. Next, you must file the Articles of Organization with the state’s business filing agency, which typically includes details about the business, its registered agent, and its duration. Creating an Operating Agreement is essential as it outlines the management structure, member roles, and operational procedures. Obtaining an Employer Identification Number (EIN) from the IRS is a crucial step for tax purposes. Additionally, you need to register for state taxes, ensuring compliance with state-specific tax requirements.

Pros and Cons

The primary advantages of a Multi-member LLC include limited liability protection for its members, flexibility in management and profit distribution, and the benefits of pass-through taxation. However, there are also disadvantages, such as the complexity involved in formation and compliance, the potential for conflicts among members, and the imposition of self-employment taxes on earnings.

LLC Members

Everyone who owns part of an LLC is called a member, and members can be individuals, corporations, or other LLCs. In most cases, members have made capital contributions to the LLC or gained a share of ownership through their role in starting and running the company. 

A member’s ownership share is generally based on the amount of their contribution, but it can be divided in any way the members agree upon. All members get a share of profits based on their ownership share, voting rights, and other rights defined in the operating agreement.

The number of members an LLC can have is unlimited. The exception is if the LLC chooses to be taxed as an S-Corp. In this case, the LLC can have no more than 100 members. 

Your LLC members will be specified in the operating agreement.

LLC Member Restrictions

There are a few restrictions to being a member of an LLC. Even minors can be members in most states. There are no citizenship or residency requirements for LLC members. Individuals can be members, as well as corporations. 

However, along with placing a limit on the number of members, choosing to be taxed as S-Corp places some restrictions on who can be a member of your LLC. For example, for S-Corp LLCs, partnerships, corporations, and certain financial institutions cannot be members or non-resident aliens.

Management and Decision-making in Multi-member LLCs

Roles and Responsibilities of Members

In a Multi-member LLC, the management structure can either be member-managed or manager-managed. Member-managed LLCs involve all members in the decision-making process, while manager-managed LLCs appoint specific individuals to handle management duties. Each member’s role should be clearly defined, outlining their duties and responsibilities, and establishing clear lines of authority and delegation to ensure efficient operation.

Voting and Decision-making Process

Voting rights in a Multi-member LLC can be based on membership interest or per capita, depending on the provisions in the Operating Agreement. The decision-making process should detail how major decisions are made, including the voting thresholds required for approval. Having a dispute resolution method in place is crucial for resolving disagreements among members, ensuring smooth operations.

Operating Agreement and Its Importance

The Operating Agreement acts as the legal foundation of a Multi-member LLC, providing a structured approach to management, decision-making, and profit distribution. It offers clarity and structure, setting clear guidelines for operations and member interactions. Importantly, it helps prevent and resolve disputes by establishing expectations and procedures, making it an essential document for the LLC’s success.

Taxation of Multi-member LLCs

By default, a Multi-member LLC is treated as a partnership for tax purposes, meaning its profits and losses pass through to the members’ individual tax returns. However, LLCs have the flexibility to elect taxation as a corporation, either as a C-Corp or an S-Corp, depending on their strategic tax planning needs.

Pass-through taxation allows the profits and losses of the LLC to be reported on the individual members’ tax returns, avoiding double taxation at the corporate level. This tax treatment can provide significant benefits, particularly for small businesses looking to streamline their tax obligations.

If a Multi-member LLC elects to be taxed as a C-Corp, it will be subject to corporate income tax rates, which can result in double taxation—once at the corporate level and again on dividends paid to members. Electing S-Corp status can offer pass-through taxation benefits while potentially saving on self-employment taxes, depending on the LLC’s structure and income distribution.

Liability of Multi-member LLCs

Protection of Personal Assets

One of the key advantages of a Multi-member LLC is the protection of personal assets. Members are not personally liable for the business’s debts and obligations, provided the LLC is properly maintained as a separate entity. This limited liability protection ensures that members’ personal assets remain secure from business-related liabilities.

Potential Risks and Legal Issues

Despite the liability protection, there are potential risks and legal issues that members must be aware of. For instance, if the LLC is not maintained properly or if members fail to comply with legal and regulatory requirements, there is a risk of piercing the corporate veil, which can expose personal assets to liability. Adherence to all legal requirements is crucial to maintaining the LLC’s liability protection.

Liability of Individual Members

While members generally enjoy limited liability, situations may arise where personal guarantees are required, potentially exposing individual members to personal liability. Additionally, any misconduct or illegal actions by individual members can have legal ramifications for the LLC, emphasizing the importance of ethical and compliant business practices.

Dissolution and Termination of Multi-member LLCs

Dissolution of a Multi-member LLC can occur for various reasons. Voluntary dissolution happens when members agree to terminate the LLC, while involuntary dissolution can result from a court order or failure to comply with legal requirements. Additionally, the LLC may dissolve upon reaching the end of its specified duration if such a term is included in the Operating Agreement.

The termination process begins with a member resolution to dissolve the LLC, followed by filing the necessary dissolution documents with the state. It is essential to notify creditors and settle any outstanding liabilities during this process. Properly winding up the LLC’s affairs ensures a smooth transition and avoids potential legal complications.

Upon dissolution, the LLC’s assets are liquidated to pay off any remaining debts. After settling liabilities, the remaining assets are distributed to members based on their ownership interests as outlined in the Operating Agreement. This process ensures that all financial obligations are met, and members receive their fair share of the remaining assets.

How LLC Members Get Paid

How you get paid as an LLC member depends on how you’re taxed. If you have not chosen S Corp status for your multi-member LLC, you will be taxed as a partnership if you have more than one member.

Members can receive distributions all at once or can receive payments periodically. To pay a member’s distributions, simply write a check from the business bank account to the member. Then record the withdrawal on your books as an owner’s draw, which reduces your owner’s equity account.

Generally, profit distributions are divided based on the members’ ownership percentages. Each member will report their profit, not just draws, on Schedule C of their tax return. They’ll also be required to pay self-employment taxes on the profits.

If you’re taxed as an S-Corporation, members cannot be paid in draws from your LLC. Instead, they must be paid as employees of the LLC. 

To become an employee, you’ll file a W-4 form. Then you can pay yourself a salary and receive a W-2 for tax purposes. Members must have an active role in the LLC to be an employee. 

If a member is a silent member, uninvolved in LLC operations, they cannot receive a salary or be an employee. Either all active members receive a salary, or none do. 

The wages paid to members are considered expenses of the LLC and deducted from profits. Per IRS rules, your salary must be within industry norms for your role, so you can’t pay yourself an unreasonable amount. Also, remember that income and employment taxes will be withheld from your salary checks as an employee.

You May Also Wonder:

Can you Change a Single-Member LLC to a Multi-Member LLC?

Yes, a Single-Member LLC can be converted to a Multi-Member LLC by adding new members and updating the LLC’s Operating Agreement and ownership structure. This may also require filing amended documents with the state.

Can Multi-member LLCs have non-voting members?

Yes, Multi-member LLCs can have non-voting members. The terms and roles of non-voting members should be specified in the Operating Agreement.

Are Multi-member LLCs required to have a registered agent?

Yes, Multi-member LLCs are required to have a registered agent. The registered agent receives legal and official documents on behalf of the LLC.

Can a Multi-member LLC have members who are not U.S. citizens or residents?

Yes, a Multi-member LLC can have members who are not U.S. citizens or residents. There are no citizenship or residency requirements for LLC membership.

How many members can a multi-member LLC have?

There is no maximum limit on the number of members a Multi-member LLC can have. The LLC can have as many members as needed, depending on its structure and purpose.