Multi-member LLCs offer a lot to those willing to form them. They differ from other business entities in their flexibility in who can join and tax payment requirements.
While multi-member LLCs can propel your small business towards success, there are some things that you should know, such as the advantages, disadvantages, and what you need to form one.
What Is a Multi-Member LLC?
A multi-member LLC is a type of business entity. Members of LLCs are owners; multi-member LLCs are those with at least two owners.
The requirements of multi-member LLCs are broad; the only strict requirement is age:
- Members must be age 18 or over
There are no citizenship requirements for LLC members. Other business entities can also be members of LLCs, such as:
- Other LLCs
- Pension plans
Advantages of Multi-Member LLCs
There are advantages that multi-member LLCs offer their members, including:
Multi-member LLCs offer limited liability to its members. Members of their LLC aren’t individually responsible for what their LLC does.
Member assets will remain separate from the LLC, meaning that members won’t experience personal liability if their assets are at risk.
Multi-member LLCs are also pass-through entities. Pass-through entities offer an advantage because the company’s profits don’t experience taxation at a federal level. Instead, its profits pass through to its members, meaning that they pay on their individual income tax returns.
When the LLC loses money, members can claim the losses on their tax returns, which can help decrease the amount owed to the IRS.
Third, LLCs offer flexibility unmatched by other business entities. Members can choose whether to manage their LLCs on their own, or members can appoint managers.
LLC managers can be people inside or outside of the LLC. Members can appoint other members as managers, or they can select people from outside of the company.
Finally, LLCs offer relative ease of upkeep. You won’t need many documents to start your multi-member LLC. While taxes and other requirements vary from state to state, the basics of forming a multi-member LLC are almost the same in every state.
How to Form a Multi-Member LLC?
To form a multi-member LLC, you’ll do the following:
- Choose a Name
- Get an Employer Identification Number (if applicable)
- Create and submit Articles of Organization
- Create an Operating Agreement
- Register for taxes
- Register your LLC in your state
Choose a Name
The first step in starting your LLC is to follow the rules to choose your by guidelines set business name. With an LLC, its name needs to have a variant of “limited liability company” or “LLC.”
There are two things to be aware of when choosing a business name. Some states don’t allow LLC names that are already in use. Second, there may be a fee to reserve a business name.
Get an Employer Identification Number
If you don’t already have an Employer Identification Number (EIN), you should apply for one soon. It is free to do so, and if you apply online, you’ll receive an EIN immediately.
Articles of Organization
After you choose a name, work with a registered agent, 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 about your LLC in your state.
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 the LLC. Your registered agent must live in the same state as the location of your business.
After creating your Articles of Organization and working with a registered agent, the next step is to submit your articles.
Prepare LLC Operating Agreement
Your LLCs Operating Agreement will contain financial and managerial information. Your LLCs operating agreement will provide:
- The distribution of losses and profits to the members
- The management structure of the LLC (manager-managed or member-managed)
- How you’ll structure meetings and votes
- The responsibilities and rights of the members
- The voting power of the members
What Is Distributive Share?
Distributive share refers to the business’s net income, calculated on Form 1065 (partnerships) or Form 1120-S (S-Corp). With multi-member LLCs, members will file using Form 1065.
If there’s no partnership agreement, a partner’s distributive share will be based on a partner’s ownership. This amount will comprise:
- Capital contributions
- Economic or taxable interest in interest income
- Rights of partners to assets if partnership experiences liquidation
Difference Between LLC and Multi-Member LLC
An LLC with one member has essential differences compared to one with multiple members. There are different required forms and taxation.
Single-member LLCs must pay taxes as a sole-proprietorship. There are more forms for single-member LLCs to complete:
- Schedule C (Profit or Loss from Business)
- Schedule E (Supplemental Income and Loss)
- Schedule SE (Self-Employment Tax)
Single-member LLCs must also pay taxes for their LLC using their personal tax returns.
LLCs with multiple members must pay income taxes as a partnership. While single-member LLCs must complete Schedule C, Schedule E, and Schedule SE for tax purposes, multi-member LLCs will file as a partnership. Members will need Schedule K-1: Partner’s Share of Income, Deductions, and Credits (this Form will need to be attached to Form 1040.)
Taxes for Multi-Member LLC
There are two ways that multi-member LLCs can pay taxes: a partnership or a corporation or S-Corp.
For multi-member LLCs that pay taxes as a partnership, it will follow this process:
- Partnership files Form 1065
- Members will receive a Schedule K-1 (all partners must complete this)
- Provide information from Schedule K-1 to Schedule E – Supplemental Income
- Include Schedule E information on your Form 1040 or Form 1040-SR
For multi-member LLCs electing to pay taxes as a C-Corp or S-Corp, members would pay taxes in the same way as those shareholders. This process involves:
- Form 8832: Entity Classification Election (required for LLCs electing to become a C-Corp)
- Form 2553: Election by a Small Business Corporation (required for LLCs electing to become an S-Corp)
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This post is to be used for informational purposes only and does not constitute legal, business, or tax advice. Each person should consult his or her own attorney, business advisor, or tax advisor with respect to matters referenced in this post. 1-800Accountant assumes no liability for actions taken in reliance upon the information contained herein.