Everything You Need to Know About Multi-Member LLCs

Shifting your small business from its current legal entity to a multi-member limited liability company, commonly called an LLC, can be a transformative step in your career. Forming a multi-member LLC is a popular choice among entrepreneurs due to numerous benefits, including flexibility, favorable corporate tax considerations, and liability protections.

But before you make the leap, you should know what you're jumping into. This blog details important aspects of running a multi-member LLC, its advantages, step-by-step formation guidance, tax filing requirements, and more. 

What is a multi-member LLC?

A multi-member LLC is a business entity not usually embraced by first-time owners. To qualify as this entity, you must have at least two "members" or owners who must be 18 or older. Members of the LLC do not have to be US citizens to own this type of business.

While a single-member LLC or a sole proprietorship is preferred for businesses with a single owner, multi-member LLCs are advantageous for shared endeavors. This can include family businesses and businesses owned with a friend, partner, or married couple, among other scenarios. This provides business owners with personal asset protection for each member and pass-through taxation, allowing profits and losses to pass directly to each member's personal tax return.  

The benefits of a multi-member LLC

There are numerous advantages to forming as a multi-member LLC, including the following:

Flexibility. Structure the business in a way that best suits your needs, including choosing who manages it.

Liability. Personal assets remain separate from the business, insulating members from experiencing personal liability if business assets are at risk.

Easy maintenance. Fewer documents are needed to start a multi-member LLC than other  types of LLCs.

Favorable taxation. Members can claim the losses on their personal tax returns when the business loses money, helping decrease what's owed to the IRS. 

Ownership. Allows for shared ownership, facilitating a wide range of ideas and resources.

Profit and loss allocation. Members can agree to distribute the profits and losses in a manner that might not match ownership percentages.

Credibility. A multiple-member LLC increases your business credibility with potential partners, lenders, and investors.

Steps to form a multi-member LLC

Choose a Name

The first step in starting your multi-member LLC is to choose your business name. The name must include a variant of ‘limited liability company’ or ‘LLC’ and must be unique. Some states offer a name reservation service for a fee. 

Get an Employer Identification Number (EIN)

All businesses need an EIN to operate. Without it, you cannot open a business bank account or hire employees. Easily apply for a free EIN through the IRS website, which you will receive immediately. 

Select a Registered Agent

Another critical step is working with a registered agent. A registered agent is a designated person who will accept federal and state legal documents on behalf of your business. Your registered agent must live in the same state as the location of your business.

After working with a registered agent, the next step is to create and submit your Articles of Organization. 

Submit Articles of Organization

After you choose a name, work with a registered agent, create your articles of organization, and have optionally prepared an LLC operating agreement, you’ll file with the state. The filing includes submitting the Articles of Organization, a legal document providing the state with information about your LLC. 

In the Articles of Organization, you’ll provide your LLC’s address and name and the LLC’s registered agent. You’ll send this document to the Secretary of State. After you pay a filing fee, you’ll receive formal certification, which allows you to begin operations. 

Operating Agreement for Multi-Member LLCs

A multi-member operating agreement allows you to customize and establish the rules owners agree to follow. Submitting this agreement to your state isn't mandatory, but it is essential for your multi-member LLC and ownership.

Your operating agreement will contain pertinent information that will provide answers for: 

The distribution of losses and profits 

The management structure  

Meeting structure and voting power

The rights and responsibilities of each member 

Other topics the agreement might address include designating the member responsible for drafting an annual report and protocol for when new members are added and how it might impact ownership interest.

Tax Considerations for Multi-Member LLCs

Multi-member LLC owners enjoy limited liability protection via pass-through taxation, where profits and losses flow directly to their respective personal income tax returns. While pass-through taxation is a feature shared with other business entities, multi-member LLCs have unique tax responsibilities due to the nature of their structure.

Unlike sole proprietors or LLCs, multi-member LLCs are responsible for submitting a Schedule K-1 form to the IRS. Schedule K-1 is the form used to report each owner's share of earnings, losses, credits, and deductions. Once completed, submit to the IRS with any other required documentation. 

Management and Decision-Making in Multi-Member LLCs

Deciding who should manage the business and selecting who has decision-making power should be detailed in your operating agreement. There are two viable options: member-managed LLC and manager-managed LLC.

The member-managed option is the most common and typically involves each owner contributing to the daily operation of the business. While the member-managed route is more common at first, some businesses will opt to hire employees to manage aspects of the business once it grows beyond the scope of ownership's capabilities. 

The other less common option for multi-member LLCs is manager-managed. This involves hiring employees to manage the business and deciding on the level of authority they should be empowered with. This is an excellent selection if ownership doesn't intend to be involved on a daily basis or if the company is already too large, requiring more experienced management. 

Common issues faced by multi-member LLCs

Keeping your multi-member LLC compliant is an ongoing issue ownership must address. Compliance issues touch many aspects of the business, and falling behind or failing to handle one may impact other areas, creating a domino effect.

Common issues ownership must address include: 

Licenses and permits. You are not permitted to operate if your business licenses expire. 

Member meetings. Owners are typically required to schedule meetings and record meeting minutes. 

Taxes. How to file taxes for a multi-member LLC can be tricky, and you'll need a multi-member LLC tax form. If your federal tax return is not filed on time or is underpaid, it could invite penalties and fees. IRS issues may impact your ability to seek capital, causing additional problems.  

There might be a point where the common issues multi-member LLCs face become too unwieldy for ownership to handle. This is usually a sign that businesses need assistance from more specialized professionals. 

Partner with an Accounting Expert to Optimize Your Multi-Member LLC

Whether it's formation difficulties, federal income tax compliance issues, problems obtaining permits, or other common challenges, running a multi-member LLC takes a lot of work. Tackling and addressing such unpleasantries can sometimes feel impossible, which is why so many multi-member LLCs trust 1-800Accountant, America's leading virtual accounting firm for small businesses, for their professional needs.  

Whether it's small business taxes, entity formation, obtaining an EIN for multi-member LLCs, or any of our professional accounting services, we have the solution you need at a price that works for you. Schedule a quick consultation – usually 30 minutes or less – to learn how we can help.