In the business context, the definition of a member is an individual or entity holding a membership interest in a limited liability company (LLC).
LLC members own the limited liability company. Most states don’t place restrictions on ownership, so an LLC member may be an individual, corporation, other LLC, or foreign entity. There is generally no limit on the number of members an LLC can have. In most states, an LLC is permitted to exist if it has at least one member.
A limited liability company is a legal entity that protects owners from personally absorbing the debts and liabilities of the business. Formal registration takes place with the state government. Several steps go into this process. We can help you through it with our LLC formation services.
LLCs are subject to pass-through taxation. The business is taxed at the LLC member level and not at the business level. In comparison, corporations are taxed at both the business and personal levels.
Each state has slightly different requirements, regulations, and fees surrounding limited liability companies. It’s worth doing your research before deciding to form an LLC.
Limited personal liability is the primary member advantage. If something goes wrong with the business, a member is not held personally liable. LLCs can have flexible management structures, depending on the needs of the business, as well as flexible allocation of profits and losses. Pass-through taxation is also beneficial.
There are a handful of reasons why forming an LLC may not be the best move for your business. An LLC may be subject to payroll or self-employment taxes. If you are in a professional group, some states do not allow LLC formation. Depending on where you stand, transferability restrictions could be a member disadvantage. Consent of the membership is generally necessary for every transfer of membership interest.
There are several ways management and membership can be structured. Much of this depends on the relationship between parties involved and the type of business. The two main types of LLC management structures are member-managed and manager-managed.
The most common LLC structure is member management. This means that all the members share the daily responsibilities of running the company. One of the reasons this structure is common is that most limited liability companies are small businesses that don’t need a separate management structure to operate successfully. Most states default to the member-managed structure if there is no indication otherwise.
For passive investors, a manager-managed structure may be preferable. Large businesses may also benefit from a manager-managed structure. This allows for additional oversight and organization.
An operating agreement is an important document that details how your company will operate. Most operating agreements include a member definition. Other provisions may include management structure, dispute resolution, profit and loss sharing, ownership transfers, member rights and duties, and the process for adding a member, to name a few. Most states don’t require an operating agreement, but it is highly recommended. Use our Operating Agreement Template to get started.
Now that you understand the member definition, you can determine whether a limited liability company is the best option for your business. Take into consideration the general advantages and disadvantages, your type of industry, and your preferred management structure in making your choices.
Helping new businesses get underway is one of our specialties. Forming an LLC is a popular option for starting your own business, and with good reason. Whether you are still deciding on your business structure or looking for ways to promote growth and stay compliant, we are excited to be a part of your journey.
Disclaimer: The content on this page is for informational purposes only and does not constitute legal, tax, or accounting advice. If you have specific questions about any of these topics, seek the counsel of a licensed professional.
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