Multi-Member LLC Definition

What is a multi-member LLC?

The limited liability company (LLC) is a business structure created under state law. Compared to other business entity types, the LLC provides the limited liability protections of a corporation with the flexibility of a general partnership. 

Once registered with the state (whether the entrepreneur does so themselves or uses an LLC formation service), the LLC becomes a legal entity separate from its owners, who are called “members.” Depending on whether the business has one member or several, it can be a single-member or multi-member LLC. Our guide on how to start an LLC covers the full formation process. The IRS automatically taxes a single-member LLC similarly to a sole proprietorship and a multi-member LLC as a general partnership, although the owners can change into a different tax structure if they so choose.

Multi-Member LLC Benefits

It’s common for entrepreneurs to start a business with at least one partner. These business owners don’t have to file paperwork with the state to start a general partnership. And if the owners don’t register a legal entity, the business is automatically treated as a general partnership for tax and liability purposes. The partnership doesn’t have an identity separate from its owners. Instead, it is considered to be an extension of their personalities.

However, business owners can gain limited liability benefits by registering the company as a corporation or LLC. After the owners register the company this way, business creditors cannot access the owners’ assets to satisfy business debts without extenuating circumstances. This personal asset protection is a significant advantage for the LLC over the casual nature of the general partnership, which entirely lacks limited liability benefits.

If someone needs to decide between an LLC and a corporation, it’s worth noting that the LLC provides more flexibility and customizability. The members can control the company’s income distribution and governance through the LLC operating agreement. The members can agree to set the rules they want without a vote of the shareholders or a board of directors. On the other hand, a corporation’s structure is much more rigid.

A good LLC needs an operating agreement to fit its business goals. ZenBusiness offers a helpful operating agreement template that can enable any LLC owner to customize their business operations.

Multi-Member LLC Disadvantages

Like every business structure, the multi-member LLC has its disadvantages as well. First off, it requires more paperwork and filing fees than a general partnership.

Additionally, the LLC provides fewer options than the corporation for selling ownership interests in the company. Because corporate shareholders don’t have an operational role in the business, shareholders can easily transfer their shares to someone else. On the other hand, LLC membership is often limited by the terms of its operating agreement. This limitation is a big part of why it’s rare to see venture capital investments in LLCs.

Multi-Member LLC Examples

Here are two examples of multi-member LLCs. First, consider a husband and wife, Mary and Bill, who want to start a restaurant. Before taking out loans and buying equipment, they decide to form an LLC to protect their personal assets. Because Mary and Bill will share ownership of the business, it’s considered a multi-member LLC.

Next, consider three software engineers, Phil, Karen, and Adam, who want to produce an app to help shoppers create grocery lists. Before patenting their idea or starting a marketing campaign, they write an operating agreement and form a multi-member LLC. The operating agreement states that Phil and Karen will provide most of the coding while Adam provides financial backing. Although Adam provides more capital, the operating agreement specifies that Phil, Karen, and Adam will split the profits equally.

Summary

A multi-member LLC is a business structure with flexibility and personal asset protection. LLCs can outline their own business procedures through an operating agreement.

The IRS classifies a multi-member LLC as a partnership for tax purposes unless the members elect corporate taxation. This means that, by default, the LLC uses pass-through taxation rather than paying income taxes at the entity level. ZenBusiness offers some helpful guides about multi-member tax filings and how to get paid in a multi-member LLC.