What Is a Multi-Member LLC? - How to Start my LLC

What Is a Multi-Member LLC?

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Carolyn Young has over 25 years of experience in business in various roles, including bank management, marketing management, and business education.

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What Is a Multi-Member LLC?

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.

Read on to learn how a multi-member LLC works.

What Is an LLC?

An LLC is a popular business structure for startup companies due to its many benefits. An LLC provides personal liability protection, for example, so that your assets are not at risk if your business is sued or cannot pay its debts. 

Also, an LLC is a “pass-through entity” in taxes, meaning that the LLC itself is not taxed. Instead, income passes through the company to the LLC owners or members, who report it on their tax returns. 

LLCs also offer flexibility in management, as there are few requirements regarding organizational structure. Again, an LLC with more than one owner is a multi-member LLC.

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.

The Operating Agreement

Most states do not require an operating agreement, but it’s a very important document. It defines the ownership percentages of members and how profits and losses are distributed. Those are the most important elements of the operating agreement, but it should also include the following:

  • Each member’s rights and responsibilities
  • Management structure and roles 
  • Voting rights of each member
  • Rules for meetings and voting
  • What happens when a member sells their interest, becomes disabled, or dies

You can find operating agreement templates online, but it’s best to have them drawn up or reviewed by an attorney. The language of an operating agreement is crucial and can often help determine how member disputes will be resolved. 

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.

In Closing

Many entrepreneurs who go into business with partners choose to form a multi-member LLC because of its many benefits, such as personal liability protection. However, when you start a multi-member LLC, it’s crucial to have a clear operating agreement that defines ownership and specifies member rights and responsibilities. 

A good operating agreement should also contain language about resolving member disputes. For these reasons, it’s a good idea to have an attorney involved in drafting your operating agreement to make sure that all members’ rights are protected.