A multi-member LLC is a limited liability company in which several owners share control of the company, and is different from a single-member LLC.To find out all the advantages and pitfalls of this structure, continue reading our article.
What Does a Multi-Member LLC Refer to?
A limited liability company represents a type of legal structure functioning as an autonomous legal entity. The owners of this venture are known as members. LLCs are generally divided into single-member and multi-member entities, depending on the number of participants.
A multi-member LLC (MMLLC) is an enterprise merging two or more members to jointly commence a business. This option is usually preferred by relatives, married couples, or friends as it offers optimal conditions for business development.
In creating an MMLLC, the contributions of the participants build up its capital. The shares of every participant are specified in the constituent documents, an Operating Agreement included. Most often, the earnings are distributed by the participants proportionally to their ownership interests. However, if it does not fit you, it is workable to foresee a specific allocation method, which will satisfy all the members.
Unlike some other business arrangements, in several states, the establishment of an LLC is feasible to a broader range of individuals, such as:
- Non-resident individuals;
- Trust, etc.
The most typical donation to the budget of a venture is money. The investment of time or effort is crucial to set up a new entity as well.
The management structure of a multi-member LLC has two alternatives. By default, it is assumed that the organization is run by the owners. All or a few participants may undertake the daily activities of the firm. Unlike those who simply make a regular revenue without interfering in management, such participants are referred to as the active ones.
As they please, the owners can assign current issues to a manager. In that event, the owner remains in charge of selecting the direction of the LLC development, fixing important matters, and the ability to conclude transactions on behalf of the firm. To prevent any management conflicts, the rights and obligations of both managers and members have to be spelled out in an Operating Agreement.
A multi-member LLC is a great solution for those who are interested in launching their own venture without putting their private property, such as a house, savings, a car, and so on, at risk. As the firm functions under its name, no liability for its debts and obligations can be extended to its members or employees. If there is a judgment against the organization, creditors’ claims will be capped at the business’s funds. That distinguishes multi-member LLCs from partnerships, sole proprietorships, as well as single-member LLCs, which don’t provide such protection in most states.
When you intend to launch an MMLLC, you’ve probably heard about its tax flexibility. Normally, from the IRS perspective, an enterprise is construed as a “flow-through” tax unit. The duty to submit a return goes “through” the establishment to the owners, who are held responsible for paying their income taxes. Nevertheless, participants may apply for a corporate tax regime. In this case, if a C-corporation status is selected, an LLC will be liable for filing tax returns.
Pros and Cons of an MMLLC
The image of this model as an effective business structure is confirmed by numerous successful ventures. Its main virtues include the following:
- No limitations on the number of owners, allowing you to include as many participants as you like;
- As long as the “corporate veil” is retained, you won’t have to be liable for the company’s debts and liabilities with your own belongings;
- Agile membership requirements give other LLCs, corporations, and trusts the opportunity to acquire ownership of the company;
- The freedom to select a tax treatment and a simplified procedure for paying taxes facilitate the management of the firm and help save money;
- MMLLCs are entitled to generous tax benefits and a broad range of deductions, including a 20% pass-through deduction.
Although a multi-member company will be an apt choice for major businesses, it has some drawbacks such as:
- In contrast to other ways of operating a business, an LLC represents a formal structure. Its opening requires state registration by filing documentation and paying a mandatory fee;
- The law treats active LLC participants as its owners rather than employees, so they are responsible for paying the self-employment tax;
- Although participants can act as employees of an LLC and receive wages, it calls for a switch in the corporate tax treatment;
- LLC owners can be held liable for the other participants’ actions if fraud, a tax crime, or personal injury has been committed.
Single-Member or Multi-Member LLC
Of course, the clearest divergence between these structures relates to the number of participants. Whereas an SMLLC is founded by a single member, who has independently formed 100% of its capital, a multi-member LLC is created by multiple members. Their ownership shares are determined by the number of funds contributed.
What is more, the number of participants affects the way the company is managed. The owner of a single-member LLC normally handles all management decisions and maintains the firm’s regular operations personally. It ensures a high level of control but places more responsibility on the owner. With multi-member LLCs, in contrast, management responsibilities can be allocated among active partners according to their strengths. Additionally, if the owners have no desire to participate in running an enterprise, they might always delegate this to one or more assigned managers.
Another difference involves the type of taxation. Indeed, the tax status of a single-member LLC resembles that of a sole proprietorship. That is, instead of a corporate declaration, the owner submits a personal report, listing the profit and losses of the entity. Hence, income tax is paid at a lower rate designed for individuals. Multi-member LLCs, in turn, are taxed as a partnership. Under the general rule, such firms are also treated as “pass-through” taxable units, but they are subject to filing an information return. This paper is required so that the IRS and the participants are aware of the amount of tax to be expected.
How To Launch an MMLLC: Steps To Follow
To make an MMLLC startup run smoothly, one should comply with the statutory procedure. The company creation process can be different in each state, but the fundamental phases of launching an LLC are as follows:
- Selecting a Name
Finding the right name is the most accountable part. It has to be catchy and legitimate. Make sure that the desired option contains an “identifier” pointing to the type of business. Avoid forbidden words such as “federal,” “corporation,” “insurance,” and so forth. Before listing your preferred name in the creation documentation, check its availability by searching the state’s database.
- Submitting the Articles of Organization
This certificate is the basic paper of the venture, after approval of which the organization is considered to be officially launched. To complete the LLC Articles of Organization, you are to provide key details about the company.
- Getting an Employer Identification Number (EIN)
Are you planning to hire employees, obtain licenses, or open a commercial bank account? Maybe your firm has to pay taxes? In any of the above cases, you should apply for an EIN, which is a special 9-digit code designed to quickly identify an LLC’s tax records. The IRS does not charge a filing fee.
- Drawing Up an Operating Agreement
To ensure the trouble-free operation of the enterprise, an internal manual is a must, as it establishes the management model, as well as the basic principles and procedures. That function is performed by an Operating Agreement. In most states, this paper is an optional step to start a new organization, but it is primarily advantageous to an LLC.
- Obtaining Licenses
Most ventures need to take care of acquiring licenses or permits to get started. Their cost, class, and quantity depend on such factors as the industry and the location of the establishment. Cities, counties, and municipalities often have their own licensing regulations, so check them beforehand.
- Opening a bank account
To maintain the protection of limited liability, the owner’s personal funds and corporate assets should not be commingled. The best way to do this is to have a separate bank account for the needs of a company.
- Further Maintenance
Bear in mind that once a new firm is registered, it has some obligations. You have to regularly file an annual report to inform the state about the current activities, renew your licenses, and pay taxes on time.