Starting a business is hard work, but it’s even harder when you’re doing it alone. So should you form a multi-member LLC or stay small with a single-member LLC? Here’s what you need to know to make the best decision for your business.
Tip of the Day:
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Entity type (LLC, corporation, LLP, non-profit), management structure (manager-managed vs member-managed), tax structure, formation state, members or shareholders, and many other factors affect critical aspects of starting and running a business.
Therefore, it’s essential to research the advantages and disadvantages of each factor before reaching a final decision. This single member vs multi-member LLC guide will define both terms, analyze the structuring, discuss the pros and cons of single vs multi-member LLC, and more.
The Basic Definition
As for the difference between single member vs multi-member LLC by definition, it is simple.
A single-member LLC is owned by one person, whereas a multi-member LLC (MMLLC) has at least two owners i.e. two or more owners. Therefore, ownership is the fundamental difference that defines what is single member LLC and what is multi-member LLC.
Choosing Between a Single Member LLC vs Multi-Member LLC
Before deciding between the single-member vs multi-member LLC structure, you need to consider the following factors. You can choose the structure that satisfies your personalized needs.
#1: Ownership: A Fundamental Difference
A Limited Liability Company (LLC) is a famous business structure due to its flexibility in ownership. The LLC owners are called members.
There can be unlimited owners unless the LLC elects for S Corporation tax treatment, limiting the members to 100 or fewer. Moreover, anyone can be a member of the LLC, including:
- U.S. citizens
- Non-U.S. citizens
- Non-U.S. residents
- Business entities such as partnerships, LLCs, trusts, or corporations
Single-Member LLC Ownership
There is only one member (owner) in single-member LLC, and the owner has complete control over the company. The LLC is considered a separate and independent legal entity.
Multi-member LLC Ownership
If the LLC is owned by two or more owners (members), it will be called multi-member LLC. All the LLC members share the control of the company. The LLC is separate from its owners and considered an independent legal entity. There is no limit on the number of members in a multi-member LLC.
However, the LLC members may or may not have equal rights in the LLC, which depend on the contribution and management structure. The members will decide how or what percentage of LLC profits and losses will be distributed among themselves. Such decisions are outlined in the LLC bylaws called operating agreement.
Ownership Advantages and Disadvantages
The number of LLC members in and of itself may not indicate the ideal choice between a single-member vs multi-member LLC. The pros and cons depend on the personalized situation.
For instance, if a sole LLC owner wants to make a spouse or other relative an additional member, they will find it more beneficial to form a multiple-member LLC. On the other hand, a business owner wants to have a complete hold on LLC decisions, so they will find it’s best to create single-member LLCs.
#2: Who is the Management Here?
A Single-member LLC has one member so the owner will be the manager by default. However, in a multi-member LLC, the owners must decide the management structure of the business i:e, member-managed LLC or manager-managed LLC.
Generally, in member-managed LLC, all of the LLC’s members participate in the day-to-day affairs of the business. The majority of LLC members must approve when securing loans, entering contracts, and making major decisions. Unless LLC’s formation documents specify otherwise, the state will consider an LLC to be member-managed.
On the other hand, if LLC members agree on handing the company’s daily affairs to a manager, it will be called a manager-managed LLC. In this scenario, either a particular member/s of the LLC or a third party will be hired and given authority to manage the day-to-day operations and decisions of the business. Members that are not in a manager role might act as passive owners with just a financial investment or only participate in higher-level strategic decisions.
Regardless of the management structure or whether an LLC is single-member or multi-member, it’s crucial to have an operating agreement. Although many states do not require an LLC to adopt an operating agreement officially, it helps ensure all owners are on the same page.
#3: Income Tax Treatment
The Internal Revenue Service (IRS), by default, treats a single-member LLC as a sole proprietorship, and a multi-member LLC is treated as a partnership for federal income tax purposes.
Regardless of being taxed as a partnership or sole proprietorship, the LLC’s profits and losses will pass through to its owners’ income.
Schedule C of IRS Form 1040 will be used by the single-member LLC owner to report the company’s profits and losses. The LLC does not report or pay taxes independently.
Moreover, the LLC owners also pay Social Security and Medicare (self-employment taxes) on all taxable income from the business, and LLC may also pay other fees such as franchise tax.
#4: Personal Asset Protection
Since LLC is a separate legal entity from its owners, the personal property of LLC members is shielded from the business liabilities regardless it is a single-member LLC or multi-member LLC.
So, if the business cannot pay its financial debts or someone sues the LLC, the LLC owners don’t have to worry about compensating such liabilities with their personal assets (such as retirement savings, car, home, bank accounts, etc. However, their investment in the company may be at stake.
In some situations stated below, the LLC owners may be held personally responsible, and personal property might be at risk:
- If a member co-signs or guarantees a business loan, that compromises the separation between the personal and business transactions.
- If an LLC member is involved in illegal business activities or commits fraud.
- If the LLC is not managed according to the LLC bylaws.
#5: LLC Formation Process
The formation of both LLCs, whether it be single-member LLC or multi-member LLC, is the same. To know the complete LLC formation process, you can read our article on how to Start an LLC in Any State.
Generally, after selecting the state, you need to follow the 6 steps listed below:
- Name your LLC (or reserve a name): You must choose a unique name for your LLC. You can also reserve the name if you see the procedure may take time.
- Choose a Registered Agent: You can choose a registered agent by yourself or hire a professional registered agent company like ZenBusiness that offers free registered agent service for a year.
- File the Articles of Organization (certificate of formation): Articles of Organization are legal documents to register an LLC with the state. You can also take expert help from an LLC company to file your formation documents accurately.
- Create an Operating Agreement: You can create an LLC without an Operating Agreement. However, this documentation is necessary to avoid any future mess. Having LLC bylaws in place will guide how the business should be operated, the decision-making authority, and the roles and responsibilities of each member. An LLC operating agreement also outlines what should happen in case of disagreements among members, in the event of dying/leaving of LLC members or dissolving the LLC.
- Get an EIN: It is a unique 9-digit number that a single-member LLC requires to hire employees or opt for a specific tax structure such as an S or C corporation taxation. Multi-member LLCs must acquire EIN from IRS.
- Obtain the Necessary Business Licenses and Permits: Depending on the location and type of business, an LLC needs different business licenses and permits to operate legally.
Generally, a Single-member LLC has less-complex requirements than a Multi-member LLC. Compliance usually includes the following tasks:
- Submitting an annual report,
- Paying taxes and fees regularly,
- Holding annual meetings and keeping minutes. Though it is not mandatory for LLCs, it strengthens personal liability protection,
- Timely renewing licenses and permits,
- Maintaining company records at the office. The critical documents/information to be kept are names and addresses of members and managers, articles of organization, tax returns, operating agreement, bank statements, financial records, etc.
As the states’ requirements vary, you may require additional information to operate your business in a state-compliant manner. If you fail to comply with the state and federal rules or meet deadlines, you will face penalties, fines, lawsuits, or even suspension of the LLC. Therefore, be vigilant to fulfil compliance requirements.
Which One is Right for Your Business?
You have gotten the ins and outs of single-member versus multi-member LLC. Depending on your needs and circumstances, you can decide which structure works best for you. Hence both are mainly LLC structures, you can find our free and comprehansive guide on Limited Liability Companies and everything you need to know about it.
Aisha Noreen is an owner of a small business with more than 9 years of experience in the marketing industry. With the wisdom of an old soul, she always seeks innovation and mind-blowing ROI techniques. Her unique approach helped many small businesses thrive and she can surprise you in many ways as well. Believe it or not, her energy, passion, and creativity are contagious enough to transform your business and take it to another level.