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Multi-Member LLC
Multi-Member LLC is a type of Limited Liability Company that’s formed by 2 or more people.
When 2 or more people decide to start a business together, they usually want something easy to begin with.
They don’t want a tonne of paperwork. But, they want to protect their assets if things go south.
That’s where a multi-member LLC fits in perfectly.
In this guide, we’ll take you through everything you need to know about multi-member LLCs — with as few jargons as possible
Definition
What Exactly Is An LLC?
LLC, a Limited Liability Company, is a business entity formed by the state statute that offers liability protection to business owners.
Having liability protection means that the owners are not personally liable for the debts and obligations of the LLC. That’s what protects the owners’ personal assets if something goes south in the business.
Multi-member LLC is a type of LLC formed by two or more people as owners.
These owners are referred to as the members of the LLC.
There’s one slight technicality here.
Though a multi-member LLC is considered as a separate legal entity from its members, it is not considered a separate tax entity.
What’s the difference?
By being a separate legal entity, the assets of the LLC owners are separate from the assets of the LLC. However, since they are not separate tax entities, the income tax of the LLC is paid by the members. LLC itself doesn’t pay any income tax.
It is kinda like how it is in a general partnership.
Ownership of a Multi-Member LLC
Can Anyone Own a Multi-Member LLC?
A multi-member LLC is owned by two or more members.
These members need not be just individuals. They can be:
- An individual
- A partnership
- A corporation
- Another LLC
- Foreigner/foreign entity
Most often, you find people adding their spouses or siblings to the LLC as a member.
However, if you’re looking to raise capital from external investors, you may want to consider a C-corporation, as that offers more flexibility for investors.
For non-residents
Non-residents can form a multi-member LLC in the US with ease. It can be owned by a foreign entity or even a foreign individual.
Multi-Member LLC & General Partnership
Are Multi-Member LLCs & General Partnerships The Same?
Multi-member LLCs and partnerships have some similarities and differences:
Operating agreement
Like how a partnership is operated under a partnership agreement, an LLC also has an operating agreement. These agreements contain details and instructions regarding the business’ ownership, day-to-day administration and other management specifications.
Registrations
Both these entities are registered with the state. However, general partnership doesn’t need any registration initially. If you and a friend start a business together, you’re automatically entering into a general partnership until you form a legal entity.
Liability for partner’s actions
Partners in a partnership are liable for everything that the partnership does. They are responsible for the actions of the other partners as well.
In a multi-member LLC, members have limited liability. That’s a major difference. Although there is some protection against the actions of another member, you can still be held responsible at times. Keep in mind that liability protection is not a ‘Get-out-of-Jail free card’
Member-Managed & Manager-Managed
How To Manage A Multi-Member LLC?
Coming to the day-to-day operations of the LLC.
As members of the LLC, you have a choice to decide how to manage the LLC:
- All the members can manage it together
- Members can hire a manager/managers
In most cases, the choice is obvious — members themselves.
But there are benefits to both.
Member-managed LLC
- It is the most common choice.
- All members share responsibility for day-to-day operations. If the members don’t have managerial skills, the LLC suffers.
- In most states, member-managed is the default option until you choose otherwise in the formation documents or operating agreement.
Manager-managed LLC
- It is preferred when members want to be passive investors.
- Also, when the business is too large and diverse, it may benefit from professional management.
- You must indicate this selection in the LLC’s articles of formation or operating agreement.
- Think about the sort of authority you wanna give the manager. Should you give sole authority on hiring decisions, equipment purchases, ad expenses, etc?
Taxes
What Are My Tax Obligations?
There are 2 ways an owner can choose to be taxed as a multi-member LLC:
Partnership
- By default, a multi-member LLC is treated as a partnership i.e, members and the LLC are considered the same.
- Income taxes are paid by the members, not the LLC itself. Taxes are divided in proportion to the members’ share of ownership.
LLC as a corporation
- By filing Form 8832, single-member LLC can be treated as a corporation i.e, the owner and the LLC are considered separate.
- LLC pays income taxes on its income, not the member. Just like a C-corp, taxes are paid at the corporate tax rate, which is lower than most personal income tax rates.
Pass-through income
When the LLC is treated as a partnership, income, and losses are passed through to the members.
Meaning: Tax is paid only once at the member’s level and not at the LLC’s level.
You don’t end up in a situation where the LLC pays tax on its income, and after that money is transferred to the member, it is taxed again as personal income.
That’s how multi-member LLCs avoid double taxation.
Tax reporting
When the LLC is treated as a
There are a couple of important returns to be filed when you have a multi-member LLC.
- Form 1065 — U.S. Return of Partnership Income: This is an informational return filed by the LLC, letting IRS know how much tax each member has to pay. Even though the LLC doesn’t pay income tax, this form has to be filed.
- Schedule K-1 of Form 1065: LLC also completes Form 1065 for each member. This form contains the share of profits and losses for each member. Based on the info filed in Schedule K-1, each member can file their own personal tax returns.
- Schedule E of Form 1040 — US Individual Tax Return: Each member then has to report his or her earnings on their personal income tax return.
Employment taxes
Things are slightly different here.
So, IRS in general does NOT consider a multi-member LLC separate from its members.
But, when it comes to certain employment taxes and excise taxes, the members and the LLC are considered separate.
That’s why you use the EIN of the LLC, not owner’s EIN or SSN, for certain employment taxes and excise taxes
Department of the Treasury(TREAS)
Section 301.7701-2(c)(2)(i) of the regulations states that, except as otherwise provided, a business entity that has a single owner and is not a corporation under 301.7701-2(b) is disregarded as an entity separate from its owner (a disregarded entity). However, the regulations also treat a disregarded entity as a corporation for purposes of taxes imposed under subtitle C (employment taxes).
Question: Do I have to pay employment taxes when I have no employees?
Answer: Some yes, some no.
- If you have employees — payroll taxes + self-employment taxes
- If you have no employees — self-employment taxes
Let’s understand these taxes a little more.
Payroll tax
If the multi-member LLC has an employee, it will have to pay payroll taxes on the wages paid to the employee.
Social Security tax, Medicare taxes, and unemployment insurance are the taxes that come under these ‘payroll taxes.’
Who pays this tax, members of the LLC? LLC.
However, half of this tax amount is collected from the employee’s paycheck. Only the other half is contributed by the LLC.
The employee’s share of these taxes is withheld by the LLC when issuing the paycheck.
FICA tax(Social Security & Medicare) – The employer portion is 6.2% for Social Security and 1.45% for Medicare. LLC withholds the same amount from the employee’s paycheck as well
FUTA tax – It covers unemployment insurance. Of the total amount of 6%, states usually have a 5.4% credit. The other 0.6% is paid by the employer.
Self-employment tax
For members who are active in business operations, there is an additional tax: Self-employment tax.
Self-employment tax is like payroll tax but paid by the members. It is levied in proportion to the member’s share of profits.
Keep in mind that this tax is paid by the member, not the LLC. And it is not withheld from the member’s draw (unlike how employment tax is withheld from an employee’s paycheck). Each member has to pay this tax separately.
A member who isn’t active in the daily operations doesn’t have to pay self-employment taxes.
For non-residents
US non-residents who own an LLC don’t have to pay self-employment taxes.
How to pay all these taxes?
Whether it is income tax, payroll tax, or self-employment tax, all the taxes in a multi-member LLC are paid as estimated taxes to the IRS.
What’s this estimated tax, you ask?
Estimated tax payment is the method of splitting up your total annual tax amount into 4 quarterly payments.
You all have to estimate your income ahead of time and pay taxes on them at the end of a quarter — in April, June, September, and January.
Can’t I just pay all taxes in one shot at the end of the year? Nope. IRS won’t buy it.
IRS charges a penalty if you fail to pay an installment or pay it late. So, keep this in mind.
Also, if you’re just starting up or if you haven’t earned any income during a quarter, you can skip an installment entirely.
Pay Yourself
How Do I Pay Myself From An LLC?
Okay, time to talk about paying yourself.
Member’s draw
Members can take out money from the LLC in proportion to their share of profits. This is known as member’s draw. How much and how often you can draw should be specified in the LLC’s operating agreement.
Though members have the flexibility to draw any amount, there are some state law imposed legal limitations that prevent drawing way too much.
Unlike a salary paycheck, the LLC doesn’t need to withhold tax for social security and medicare from this withdrawal.
Salary and dividends
This is applicable only for those multi-member LLCs that have elected to be treated as a corporation.
Salary and dividend payment options aren’t available for regular multi-member LLCs.
Note
It’s important not to mix your personal expenses with your business expenses. You’ll risk piercing the protection you get from having limited liability.
Hiring
Can I Hire Employees In An LLC?
Whether it is a manager to manage the entire operations or other employees, you can easily hire employees in a multi-member LLC.
It comes with a few responsibilities, thoug
- LLC has to withhold tax from the employee’s wages for Social Security, Medicare, and unemployment insurance, and deposit it with the IRS and state agencies.
- LLC has to file Form W-2 for each employee with the IRS.
- Depending on the state you’re in, LLC has to notify state and local authorities about the new hires.
The only limitation in hiring is that the LLC cannot hire the member as an employee. That’s all.
For non-residents
If a non-resident-owned LLC has an employee living in the US, you would have to start paying payroll taxes. If you wish to avoid having to pay payroll taxes, you can hire independent contractors or freelancers. The law asks you to pay taxes if you have a ‘dependent agent’ in the US. How to establish ‘dependence’ is a slightly complicated area. It is best to speak with a lawyer regarding this.
LLC Formation
How To Form Your Multi-Member LLC?
Here are 7 steps to give you a basic understanding of how to form a multi-member LLC.
- Choose a state of formation
- Pick a name and reserve it with your state before filing your LLC (optional)
- Nominate a registered agent
- Decide if the LLC is member-managed or manager-managed
- Draft an operating agreement
- Apply for EIN
- Open a bank account
If you wanna know more about the exact formation steps, read our step-by-step guide below.
FAQ
Frequently Asked Questions About Forming A Multi-Member LLC
Here are the most commonly asked questions about forming a Multi-Member business:
If the LLC is treated as a partnership, it is legally prohibited to have an owner as an employee. However, if it is elected to be treated as a corporation, you can have members as employees.
Absolutely, yes. You can change your entity from a partnership to a corporation and it will be treated as if the partnership(as LLC) contributed all its assets and liabilities to the corporation in exchange for stock.