Learn more about what a Multi-Member LLC is in business.
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When starting a small business with a partner, you may wonder, what are the benefits of a multi-member LLC? Our team of business experts compiled this definition of a multi-member LLC and its pros and cons.
The first thing to know about the multi-member LLC business definition is that the limited liability company (LLC) is a business structure created by state law. Compared to other business structures, the LLC provides the limited liability protections of a corporation with the flexibility of a partnership.
Once registered with the state, the LLC becomes a legal entity separate from its owners – who are called “members.” Depending on whether the LLC has one member or several, the LLC can be a “single-member LLC” or a “multi-member LLC.” The IRS automatically taxes a single-member LLC as a sole proprietorship and a multi-member LLC as a general partnership.
There are several multi-member LLC advantages. It’s common for entrepreneurs to start a business with a partner or multiple partners. You don’t have to file paperwork with the state to start a partnership. And if you don’t register a legal entity, your business is automatically treated as a general partnership for tax and liability purposes. The partnership doesn’t have an identity separate from its owners.
However, business owners can gain limited liability benefits by simply registering the company as a corporation or LLC. After the owners register the company, the business creditors cannot access the owners’ assets to satisfy business debts without extenuating circumstances.
If deciding between an LLC and a corporation, the LLC provides more simplicity 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.
If you want to write an Operating Agreement that fits you and your business goals, we can help. Our LLC Operating Agreement Template allows you to customize your business operations.
Like every business structure, the multi-member LLC has its disadvantages.
The multi-member LLC requires more paperwork and filing fees than a general partnership. 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. However, the LLC members can choose corporate taxation if that works better for them. Check out more about Multi-Member Tax Filings.
Additionally, the LLC provides fewer options than the corporation for selling your ownership interest. 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.
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, their LLC is considered a multi-member LLC.
Next, consider two software engineers, Phil 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 will provide most of the coding while Adam provides financial backing. Although Adam pays in more capital, the Operating Agreement specifies that Phil and Adam will split the profits equally.
A multi-member LLC is a statutory business structure with limited liability and flexibility. The taxation status of a multi-member LLC defaults to that of a partnership, and LLCs can create their own business procedures through an Operating Agreement.
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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.