What is a Multi-Member LLC and How to Form One
The Comprehensive Guide to Forming a Multi-Member LLC
Establishing your own business comes with many perks – you have total creative freedom and complete independence in guiding your company where you want it to go. You can shape your work/life balance, choose your teammates, and reap the financial rewards.
Of course, you must also be prepared to take on significant business and personal risks, especially if you are in a sole proprietorship.
If you wish to minimize your financial liability while still running your own business, your best course of action would be to form a multi-member Limited Liability Company (MMLLC).
While not a partnership and still far from a corporation, an LLC introduces the benefits of both situations while allowing you to remain your own boss.
Discover what a multi-member LLC is, become familiarized with the main pros and cons, and learn the steps that you need to take to form one.
Multi-member LLC explained
A multi-member LLC is a standard limited liability company with at least two or more owners. Like a typical LLC, an MMLLC (as its name suggests) offers limited liability to its owners – if the business incurs any debts or losses, the owners’ personal assets won’t be harmed. Any claimants can solely collect against the company’s assets, not the owners’.
In most instances, the owners’ financial liability is no larger than their investment in the company.
How are multi-member LLCs and single-member LLCs different?
The most evident difference between LLCs and MMLLCs is simply the number of owners – a standard LLC has just one, while MMLLCs have multiple.
Business owners commonly list their spouses or family members as owners to establish this specific business structure, and the limited liability aspect protects them all.
However, there’s more that distinguishes an LLC from an MMLLC.
In LLCs, management responsibilities are not shared – you act as both the owner and the manager. In an MMLLC, you and your partner(s) need to decide whether the business will be member-managed (everyone makes management decisions together) or manager-managed (one of the owners or a third party is responsible for company management).
Taxation is another key difference.
Single-member LLCs are taxed as sole proprietorships unless you make a different request. You wouldn’t need to file additional forms or go through any additional paperwork – you’d report all profits and losses with your personal tax returns.
On the other hand, multi-member LLCs are taxed as general partnerships unless you specify differently, and you’d need to file Schedule K-1 and additional tax forms.
When do you need an MMLC?
If you’re considering establishing a business with a friend or family member, it’s in your best interests to form a multi-member LLC. Otherwise, you would automatically be regarded as a general partnership, which brings many of the same risks as a sole proprietorship.
Should your general partnership fail to pay off its debts, collectors can go after you and your partner’s personal assets, including homes, cars, valuable items, and other property.
As mentioned above, you can enjoy greater protection with an MMLLC. Debt collectors can only go after the business assets and hold you financially responsible for a limited sum.
Pros and cons of multi-member LLC
Multi-member LLCs have several unique advantages that you can enjoy:
- An MMLLC has no limits on the number of allowed members;
- The members don’t have to be US citizens;
- You can form MMLLCs with individuals, other LLCs, or even corporations;
- You don’t pay corporate taxes;
- You can choose how you want to be taxed; and
- An MMLLC is a pass-through entity.
Like any other business entity, a multi-member LLC is not perfect. It also has a few drawbacks that you should be aware of before you start your MMLLC:
- You’ll need to register the business with your state;
- You’ll have to pay self-employment taxes;
- You cannot be employed at your MMLLC without changing your tax status; and
- You could be held responsible for other members’ wrongdoings.
A multi-member LLC also doesn’t offer complete protection. If you (or your partners) misuse business funds, commit fraud, don’t keep all relevant records, or purposefully do something reckless or illegal, you will be held legally and financially responsible.
Steps for forming a multi-member LLC
Forming a multi-member LLC can seem like a complicated process at first. However, with the help of a few LLC tools and services and clear step-by-step instructions, you’ll be able to easily form your new company.
Come up with a business name
Your business name will shape your logo and branding, impact your marketing, and make or break your relationship with leads and clients. With the wrong name, you’ll find it difficult to stand out from competitors and grab the attention of your target market. With the right name, however, the world is your oyster.
First and foremost, check the LLC naming requirements in your state. The most common requirements are that you cannot use the same name being used by another registered business in your state and must include “LLC” in the name. There might be other requirements and even banned words, so be sure to check them out.
Once you know the dos and don’ts of naming a business in your state, you can start coming up with suitable names. As a general rule of thumb, you’ll want to keep it concise and memorable – something that’s easy to spell and pronounce and that makes sense for your niche. Pay attention to the name abbreviations and ensure that they’re not offensive or unprofessional.
Get your unique identification number
Just as everyone in the US needs a social security number (SSN), all businesses need their own unique Employer Identification Number (EIN). Assigned by the IRS, it’s an eight-digit number that identifies your business.
You’ll need the EIN to file taxes, get tax returns, open business bank accounts, hire employees, and conduct virtually every business process.
File articles of organization in your state
As a legal business entity, you’ll need to file articles of organization with your state. Also referred to as certificates of organization or certificates of formation, they’re legal documents that outline the businesses’ members and their duties, responsibilities, powers, liabilities, and all other obligations.
You’ll find the forms that you’ll need to fill out by visiting the official website of your state’s Secretary of State.
Create a multi-member LLC operating agreement (mandatory)
Often confused with articles of organization, a multi-member LLC operating agreement is a distinct form, and you shouldn’t overlook it. Within your operating agreement, you will outline all of your company’s rules, regulations, and provisions.
While it’s not legally mandatory, this agreement will help you to better manage your business and govern its internal operations.
Acquire permits and licenses for your business
Regardless of their unique structure, businesses need appropriate permits and licenses to operate legally. The permits and licenses that you need will depend on your industry and niche. For example, hotels and private practices are entirely different businesses, so they’ll require different permits.
You can check with your Secretary of State or local city offices to find out precisely what types of permits and licenses you’ll need to open the doors of your multi-member LLC.
Open a business bank account
Finally, you’ll need to open a business bank account. The business is considered separate from the owner in a multi-member LLC, so you’ll need separate bank accounts.
It’s in your best interests to do thorough research and find a local bank that offers the best terms and conditions for your needs.
Forming a multi-member LLC might seem complicated at first, but it’s nothing that you can’t accomplish. It offers many benefits, allowing you to run your business as you see fit without risking your or your partner’s personal assets.
Follow the steps outlined above, and engage in your own multi-member LLC formation without a hitch.