If you’re starting an LLC, the business entity formation process is one of the first and most important hurdles. This step can be terribly complex ...
A Guide to a Multi-Member LLC
Written by: Carolyn Young
Carolyn Young is a business writer who focuses on entrepreneurial concepts and the business formation. She has over 25 years of experience in business roles, and has authored several entrepreneurship textbooks.
Edited by: David Lepeska
David has been writing and learning about business, finance and globalization for a quarter-century, starting with a small New York consulting firm in the 1990s.
Published on January 18, 2022
Updated on October 2, 2023
Limited liability companies (LLCs) can have one owner, also known as a member, or multiple owners. As a result, there are two main types of LLCs – single-member LLCs and multi-member LLCs.
If you’re reading this, you’re likely starting a business with partners and planning to form an LLC. You’ve come to the right place, as this guide details all you need to know to run a successful multi-member LLC.
What is a Multi-Member LLC?
A multi-member LLC is simply an LLC with more than one owner. Each member has an ownership stake in the LLC and, usually, a say in LLC management decisions. Ownership percentages are most often defined in an operating agreement, and possibly in membership certificates.
Understanding a Multi-Member LLC
An LLC can be member-managed or manager-managed. In a member-managed LLC, all members have a role in LLC management. In a manager-managed LLC, certain members help manage the LLC, while other members become silent partners, or passive investors. Often in these situations, a professional manager is hired as a full-time employee to help run the business with the member managers.
Ownership shares are generally determined by the capital contribution of each member, but this need not be the case. If one member, for example, is expected to have a larger role in managing the business, the members may grant them a larger ownership stake. All members must agree on the ownership structure, which should be outlined in the operating agreement.
A multi-member LLC offers personal liability protection to all members because the LLC is a separate entity from its members and has its own debts and obligations. But if a member commits fraud or some other act that damages the business, they could be liable to the other members.
Taxation – How does a Multi-Member LLC file taxes?
By default, an LLC with more than one member is taxed as a general partnership. A multi-member LLC must file form 1065 with the IRS, which is the Return of Partnership Income. Attached to this will be K-1 forms for each member showing their share of business income.
The partnership return form is for informational purposes only. The LLC is still not taxed, as with a single-member LLC, and profits still pass through to the members based on their ownership shares. Those profits are reported on the members’ personal tax returns on Schedule C.
But if you, other members, and your tax advisor determine that it’s financially beneficial, you can elect to have your LLC taxed as an S-Corporation or a C-Corporation. This may be beneficial when your LLC reaches a certain level of income.
Multi-Member LLC Operating Agreement
While operating agreements are not required in most states, they can be crucial to smooth LLC operations, particularly for multi-member LLCs.
An LLC operating agreement details who owns the business and lays out the management structure and the working relationships between the members and the managers who oversee daily operations.
It should include:
- Each member’s LLC ownership share
- 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
The operating agreement is not filed with the state, but instead remains private. It’s advisable to hire an attorney to ensure your operating agreement is thorough and legally binding.
Pros and Cons of a Multi-Member LLC
- Members share responsibilities and can choose their management structure
- Pass-through taxation and a choice about LLC tax status
- Personal liability protection
- Formation costs
- State reporting requirements
- Potential for member disputes
Can you Change a Single-Member LLC to a Multi-Member LLC?
If you plan to bring in a partner, you can change your single-member LLC to a multi-member LLC. But the process will be considerably more difficult if it’s not already outlined in your operating agreement. This is why it’s important for even single-member LLCs to have a well-drafted operating agreement.
In any event, changing to a multi-member LLC usually involves amending the operating agreement and, in some cases, the articles of organization. Adding new members to your LLC is best done with the help of an attorney so that the interests of all parties are protected.
Multi-Member LLC Example
Here are two plausible scenarios for the formation of a multi-member LLC .
- Jack and Maria want to start a recycling business. Both want to be involved in the management of the business, and they agree that they will own the business 50-50. They form an LLC, specifying that their LLC will be member-managed. They draft an operating agreement that identifies each of them as a 50% owner and specifies their roles and responsibilities.
- Jack wants to start a recycling business, and Maria thinks that it’s a good investment and agrees to contribute capital, but doesn’t want to be involved in managing the business. They determine that Jack will own 70% of the company and Maria 30% as a passive investor. They form an LLC, specifying that their LLC will be manager-managed. They draft an operating agreement that identifies their ownership percentages and appoint Jack as the managing member.
Multi-Member LLC FAQs
Any two or more people can form a multi-member LLC. Other LLCs or corporations can also be members of a multi-member LLC.
You form a multi-member LLC by filing a document with your state, usually called the articles of organization. You should also draft an operating agreement that specifies the ownership percentages of the members.
A multi-member LLC can have an unlimited number of members. The exception is when the LLC elects to be taxed as an S-Corporation. Then the number of members is limited to 100.
Distribution percentages and procedures should be specified in the operating agreement. Generally, members can take a certain percentage of profits as distributions. A check just needs to be issued from the LLC business bank account to the member.
Generally, a husband and wife are not considered a single member, thus the LLC would be treated for tax purposes as a partnership. However, some states with community property laws have rules that may override that general rule and allow the LLC to be classified as a single-member LLC, and thus a disregarded entity.
A Guide to a Multi-Member LLC
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