If you’ve chosen to form a limited liability company (LLC), you need to determine if your business will be a single-member LLC or a multi-member LLC. In an LLC, the owners are called members, so a multi-member LLC is simply an LLC with more than one owner.
An LLC is a business entity that offers liability protection for owners, as well as pass-through taxation, much like a sole proprietorship.
Everyone who owns part of an LLC is called a member, and members can be individuals, corporations, or other LLCs. Usually, members have contributed capital to the LLC or gained a share of ownership through other contributions, such as the role they played in building the company. A member’s ownership share is generally based on the amount of their contribution, but it can be proportioned in any way the members agree upon. All members get a share of profits based on their ownership share, as well as voting rights and other rights as defined in the operating agreement.
An LLC must have at least one member, and the number of members an LLC can have is unlimited. The exception to this is if the LLC chooses to be taxed as an S-Corp. In such cases, the LLC can have no more than 100 members.
The membership of your LLC will be specified in the operating agreement.
What Is an Operating Agreement?
An operating agreement for a limited liability company (LLC) is an important legal document that lists the members and lays out their duties. An LLC operating agreement establishes the financial relationship between members and the basics of the working relationships between those members and the managers who oversee daily operations.
An operating agreement is not usually required but is highly recommended. The operating agreement should clearly define:
- The percentage of each member’s interests in the LLC
- How profits and losses will be allocated to each member
- Each member’s rights and responsibilities
- The management structure and management roles of members
- The voting rights of each member
- Rules for meetings and voting
- What happens when a member sells their interest, becomes disabled, or dies
An LLC operating agreement provides legal and financial recourse for a number of situations. If conflicts arise between LLC owners pertaining to any of the following issues, the operating agreement will provide clarity.
The specific language of the operating agreement details exactly how such conflicts will be resolved. This document details how the business is structured, the dynamics of operations, and more.
Though certain states have default rules on the books that address some of the potential challenges that might arise between LLC members, the LLC operating agreement has the potential to override such presumptions.
How LLC Members are Paid
How you get paid as an LLC member depends on how you’re taxed. If you have not chosen S Corp status for your LLC, you will be taxed as a sole proprietorship if you’re the only member, or as a partnership, if you have more than one member.
As the owner of a single-member LLC, you’re able to receive all of the profits. If the company makes $100,000, you can receive $100,000.
You can receive distributions all at once, or you can receive portions periodically. To pay yourself distributions, simply write yourself a check from the business bank account. Then record the withdrawal on your books as an owner’s draw, which reduces your owner’s equity account.
You will report all profit, not just your draws, on Schedule C of your personal tax return. You’ll also be required to pay self-employment taxes on your draws.
In a multi-member LLC, members of the LLC can also take draws from the profits. Draw amounts are based on each member’s ownership percentage. For example, if there are two members and each owns 50% and the business makes $100,000, each member can draw $50,000.
Each member pays taxes on their share of profit based on Schedule C of their personal tax return, as well as self-employment taxes. If you’re taxed as an S-corporation, you cannot be paid in draws from your LLC. You must be paid as an employee of the LLC.
To become an employee, you’ll file a W-4 form. Then you can pay yourself a salary and will receive a W-2 for tax purposes. You must have an active role in the LLC to be an employee. If you’re a silent member, uninvolved in LLC operations, you cannot receive a salary or be an employee. If your LLC has more than one member and all members play active roles in the company, you cannot receive a salary if the other members are not salaried. Either all active members receive a salary, or none do.
The wages you’re paid will be an expense of the LLC, deducted from profits just like any other expense. Per IRS rules, your salary must be within industry norms for the role you play, so you can’t pay yourself an unreasonable amount. Keep in mind that as an employee, income tax and employment taxes will be withheld from your salary checks.
A multi-member LLC is simply an LLC with more than one owner. Ownership percentages and member roles and responsibilities are spelled out in the LLC’s operating agreement. In a multi-member LLC having an operating agreement is very important, even though it’s not required. It will be your go-to document to settle any member disputes or other issues. Because it is so important, it’s recommended that you have an attorney’s help when drafting your operating agreement to ensure that all members’ rights are protected.