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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
LLC, 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, assets of the LLC owners are separate from the assets of the LLC. However, since they are not separate tax entities, 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.
A multi member LLC is owned by two or more members.
These members need not be just individuals. They can be:
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.
Multi member LLCs and partnerships have some similarities and differences
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'
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:
In most cases, the choice is obvious — members themselves.
But there are benefits to both.
There are 2 ways an owner can choose to be taxed as a multi member LLC:
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.
There are a couple of important returns to be filed when you have a multi-member LLC.
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
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.
Let's understand these taxes little more.
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 this 'payroll taxes'.
Who pays this tax, members or 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) - 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.
For members who are active in the 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 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.
US non-residents who own an LLC don't have to pay self employment 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 instalment 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 instalment entirely
Okay, time to talk about paying yourself.
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.
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.
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
The only limitation in hiring is that the LLC cannot hire the member as an employee. That's all.
If a non resident-owned LLC has an employee living 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.
Here are 7 steps to give you a basic understanding of how to form a multi member LLC.
If you wanna know more about the exact formation steps, read our step-by-step guide below
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