If you want to form a limited liability company (LLC), one of the most significant decisions is whether to form your business operation as a single-member LLC vs. a multiple-member LLC, which is also known as a multi member LLC. Both single and multi member LLCs protect owners' personal assets and have positive tax classification implications but also have their own advantages and disadvantages.
Before you spend money on legal fees and complete legal documents, find out whether single-member LLCs or an LLC business structure with more than one member is the better choice for you.
How do you form single-member LLCs vs. multiple-member LLCs?
Forming an LLC is straightforward. You file formation documents such as articles of organization with your state and pay a filing fee. Under most state law, you must designate registered agent services to accept service of process for the business entities you form. You also create an LLC operating agreement so that you have a guideline for how you will run your business. You must keep financial records.
What is a single-member LLC?
A single-member LLC is an LLC that has a single owner. In a sole member LLC, single business owners chooses the business name, sets up business accounts, applies for business licenses, chooses a registered agent, and establishes LLC bank accounts. If employees are hired, the LLC pays employment tax. LLCs must have operating agreements that determines how you will run it.
Benefits of a single-member LLC
The point of a single-member LLC vs a multiple-member LLC is to create a legally separate entity for single business owners. Single-member LLC owners have personal limited liability protections for their business' debts.
The LLC business structure creates a separate legal entity that shields the owner and offers limited liability protection from business debt but not from personal finance responsibilities. The operating agreement allows you to make all decisions on your own as the solo member.
For federal tax return purposes, all LLC business' income and business LLC's profits are reported on the owner's personal tax return. You do not need a separate tax return for the business's profits.
A SMLLC's tax treatment for income taxes is called a pass-through entity or a disregarded entity. Unless otherwise chosen (SMLLCs have the option of being taxed as a corporation if they choose to be treated as a C corp or an S corp), limited liability companies' treatment for income tax purposes is as if the LLC does not exist. The IRS has the single-member LLC pay taxes on the owner's own tax return on Schedule C. The same is true for state income tax.
You do not need to obtain an employer identification number if you do not have employees as a single-member LLC, though it can be beneficial to have one. Your taxpayer identification number is your Social Security number.
A single-member LLC does not pay self-employment tax when paying income tax. Owners just report the business income on their own tax return as part of their net income and are taxed at their own rate.
Blogger Keith Quinney decided to form a single-member LLC for his lifestyle blog. He says of his decision to choose this designation, “As the sole owner, I have complete control over the decision-making, operations, and the LLC's profits.
"Moreover, compared to other business entities, SMLLCs have straightforward requirements when it comes to paperwork, reporting, and compliance, making it easier for me to manage my business. My decision to file as a single-member LLC gives me the freedom to run my business the way I want, with the added benefits of asset protection and flexibility."
Disadvantages of a single-member LLC
The most significant disadvantage of a single-member LLC is that if you do not properly protect your personal assets, you leave yourself open to a lawsuit. It is crucial that you keep all LLC funds in your business bank account and do not deposit business funds into personal accounts or vice versa. Do not use LLC funds to pay personal expenses.
By selecting a sole proprietorship and forming your business as a single-member LLC, you have to run the business yourself. As the sole proprietor, you must apply for an employer identification number if you plan to hire employees, and you must ensure payroll taxes are paid. You must run the business each day yourself, relying on employees, if you hire them, to assist you.
Details about single-member LLCs you need to know
Because a single-member LLC is not a corporation, it cannot go public, even if it elects to be taxed as a C corp or an S corp by the Internal Revenue Service. It is still legally just an LLC with one member.
A sole proprietorship is a one-person business. Sole proprietors can choose to form a single-member LLC if they wish, but they are not automatically a single-member LLC unless the owner takes the filing steps necessary. A sole proprietorship has no personal asset protection. Any debt or liability of the business can be collected from the owner. A single-member LLC provides personal asset limited liability protection.
While a single-member LLC is not legally the same as a partnership, a partnership is also treated the same way for filing tax forms and federal tax purposes. For tax purposes, each partner reports their share of the partnership income on their personal tax returns.
What is a multi member LLC?
Multi-member LLCs or multi member LLC is an LLC with multiple members, two owners minimum, with as many business partners as you want. Any two people who have chosen to own a business together can create a multi member LLC. Sometimes spouses form a limited liability company together. Other times, a business that is a partnership decides to legally become a multi member LLC.
The difference between a partnership and multi member LLCs is that the owners have filed articles of organization and paid filing fees to change their business entity into a multi member LLC.
A multiple-member LLC must obtain an employer identification number from the IRS, even if it does not intend to hire employees and have wages paid. There only needs to be one EIN for the LLC.
The members can manage the LLC themselves or hire managers and make it a member-managed LLC.
One person cannot own a multi member LLC because it must have at least two members. However, one person could own a single-member LLC that itself owns other LLCs or other types of businesses under its umbrella.
Benefits of a multi member LLC
Just as with a single-member LLC, multi member LLCs with two or more owners enjoy the protection of their owners' personal income and assets. The business debts stay with the business, and the members' assets generally cannot be accessed to cover the multi member LLC's liabilities.
Michael Refolo, an attorney at Mirick O'Connell in Boston, says another benefit is that "one or more members could bring an expertise or contribute funds that you don't have or that is needed for the new business. You also could share in expenses or collaborate as to your startup's creative vision and business plan."
A multi member LLC pays business taxes in the same way a partnership does. They are a pass-through taxation entity. The LLC does not pay taxes. Instead its tax status requires that owners file a partnership return with the IRS, and then each partner reports their share of the LLC's income on their individual tax returns. A tax adviser can assist you.
A multi member LLC ownership structure can elect to be taxed as a corporation and, in that case, must file a corporate tax return and pay income tax at a corporate rate.
Disadvantages of a multi member limited liability company
The biggest disadvantage of a multi member LLC vs other options is running your business with a partner as LLC members who have different membership interests. Your operating agreement structures how decisions are made and how the business is run, which can minimize problems, but you must be able to run the business alongside at least one other person.
Choosing to form an LLC instead of a corporation also means you can't sell stock in your company, which may limit your growth.
Single-member or multi member LLC?
Choosing the type of LLC (single or multi member LLCs) you create depends on whether you want to be the only one person in business or have partners in your business venture. But it's important to consider the benefits and drawbacks of a multi member LLC vs. single-member LLC before you form your small business. Either path can lead to success in the business world.
Should a husband and wife both be members of a LLC?
If you and your spouse or family members want to work together as LLC members running your multi member LLC, you can both be members. Or one spouse could be a member and the other a manager of your multiple member company. If you are both members of multi member LLCs, you both must agree about decisions. Your operating agreement structures how decisions are made.
Is it better to be a single-member LLC vs. a multi member LLC?
There is no right or wrong answer in choosing a single-member LLC vs. multi member LLC. The way you should organize your company depends on whether you want to own it alone or have multiple owners, such as in multi member LLCs. Choosing a multi member LLC slightly complicates your tax filings, but both types of entities provide you with personal asset liability protection. Both must have an operating agreement.
Find out more about Starting Your LLC