Co-ownership 411

A multi-member LLC, also known as a MMLLC, is a limited liability company (LLC) with more than one member. Limited liability companies are one of the most popular business structures in the United States. They’re used by all kinds of companies and organizations that want to add structure to their business and protect the personal assets of their owners. Commonly abbreviated LLC, limited liability companies are popular for their simplicity and because they capture the best characteristics of both partnerships and larger corporations. There are two main types of LLCs: single-member LLCs and multi-member LLCs. Single-member LLCs are used for businesses owned by a single person. Multi-member LLCs are used for businesses with two or more members. This can be a partnership with two owners — or more than two members, as you’ll find in real estate co-ownership opportunities like the ones offered with Pacaso. If you’ve never been part of an LLC before (especially if you’re new to multi-member LLCs), they can seem complicated. Here are the most important things you need to know. Understanding multi-member LLCs How multi-member LLCs operate Multi-member LLCs (commonly abbreviated MMLLCs) and single-member LLCs operate almost identically. Like single-member LLCs, MMLLCs grant limited personal liability to their members. This means members enjoy some degree of personal asset protection as part of this business entity. This concept was borrowed from corporate business structures and ensures that members’ personal assets are protected if the LLC is threatened with a lawsuit. How MMLLCs are taxed MMLLCs and single-member LLCs have some differences when it comes to taxes. They share pass-through taxation as a feature, meaning that profits and losses flow directly to the owners, instead of getting taxed as a corporationThat said, MMLLCs have to do some extra math to report earnings to their individual owners via an IRS Schedule K-1 form. The purpose of the Schedule K-1 is to report each partner's share of the partnership's earnings, losses, deductions and credits. By contrast, single-member LLCs just have one member to attend to each tax season. What types of businesses use multi-member LLCs Because of their relatively easy setup and personal liability protection, multi-member LLCs can be a good fit for all kinds of businesses. That includes friends going into business together, colleagues forming a new offshoot business, or a group of investors buying property together — like a vacation home, boat or rental property. Why choose a multi-member LLC Multi-member LLCs are a common choice for shared business ventures. Family businesses, co-owned companies, married couples and individuals sharing property gravitate toward this structure because it protects all related parties from personal liability in terms of business expenses or debts. MMLLC examples Here are a few examples of scenarios in which a multi-member LLC might make sense. Example 1: Mark and Leah are a married couple. Leah decided to open a salon about five years ago, and Mark’s name is also on the lease. Leah suggested they form a multi-member LLC to shield their personal assets from the salon’s debts. When Covid-19 hit, Leah struggled to pay rent and eventually shuttered the business with some outstanding bills. Mark and Leah’s personal finances and assets, like their house and cars, were safe despite the salon’s debts. Example 2: John and Miguel want to become fractional owners of a luxury vacation home. This will allow them to enjoy a dream second property, without shouldering the entire cost of the home purchase, upkeep and management. By all owners forming a multi-member LLC, there’s an operating agreement in place that dictates how expenses are shared and how scheduling is decided. Having a multi-member LLC also means that John and Miguel can sell their shares down the road without other owners having to sell. Takeaways In short, a multi-member LLC is: Popular for businesses and organizations with multiple owners Designed to provide personal asset protection Run by a pass-through structure, meaning that profits and losses are reflected on each member’s personal tax return Common questions about multi-member LLCs Who can form a multi-member LLC? The LLC business structure can be formed by almost anyone collaborating with at least one other person on a business venture. Be sure to check any restrictions in the state where you live. Each state sets mandates for LLC eligibility, but most agree that as long as you’re 18 years of age or older, you’re free to join or form an LLC. Citizens and non-U.S. citizens are both welcome, as are entities like corporations or other LLCs. How do you form a multi-member LLC? Because LLCs are regulated at the state level, you’ll first file articles of organization of your MMLLC with your secretary of state. Be prepared to make some decisions ahead of time and share some info when you register: Your MMLLC’s name Your name and address Management structure for the MMLLC Names of other MMLLC owners You’ll also be required to pay a modest filing fee. There are annual fees required for the upkeep of your MMLLC, but to register, expect to pay around $100 in most states. Do I need an operating agreement for my MMLLC? Having an LLC operating agreement in place is a good idea for any LLC, but it’s especially important when there are multiple members running one business. An operating agreement outlines the roles, responsibilities and requirements of each member and manages. It also includes specifics on how you want the business to run, how profit disbursements are made, how voting will be done, and how disputes among members will be settled. Once my MMLLC is set up, are there ongoing management tasks? Yes — in addition to running your business, you’ll be responsible for keeping your LLC in good standing with the state that issued it. While specific requirements vary state by state, the most common requirements include renewing necessary licenses and permits, filing an annual report, paying any required fees, holding member meetings and documenting meeting minutes, and reporting changes with the state. An example of a change in your LLC would be if members leave or if you start using a different management company. If you don’t comply with your state’s LLC requirements, you could be subject to fines or even a cancellation of your LLC. Who manages a multi-member LLC? MMLLCs members decide how it is structured. Some multi-member LLCs elect one member or a third party to manage the business, which is called a manager-managed MMLLC. If the entire group participates equally in running the organization, it’s a member-managed MMLLC. How many members can a multi-member LLC have? There is generally no limit on the number of members a multi-member LLC can have. These members can be individuals, corporations, foreign entities and even other LLCs. What are the pros and cons of a multi-member LLC? The pros of a multi-member LLC include limited personal liability, unlimited members and a well-known and documented business structure. And, compared to corporate business structures, the pass-through nature of LLCs mean that your federal taxes may be a little less complicated. Still, it’s recommended to consult a tax professional before filing your federal tax return. A major con to this structure is that an action of one or more LLC members can affect the others. For example, if one member participates in fraud or gets lax in their bookkeeping in regard to the business or property, other members can be held liable for their mistake. Do my spouse and I need a MMLLC? If you and your spouse open a business, you may need to file for a multi-member LLC depending on where you live. Spouses in community property states (Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington and Wisconsin) are already considered joint owners, so a single-member LLC will suffice. In all other states, a MMLLC is a good idea as it protects both partners if financial or legal struggles surface in the business. How are multi-member LLCs taxed? Taxes are a little different between MMLLCs and single-member LLCs. Both LLC types use pass-through taxation, where profits and losses flow directly to the owners. When it comes to federal taxes, by default, multi-member LLCs are treated like partnerships unless they request otherwise. Similarly, single-member LLCs are taxed as sole proprietorships by default. The key difference is that single-member LLCs can file via their personal income taxes every year; MMLLCs need to give each of their owners a Schedule K-1 tax form to do the same. There are two different tax classifications you can choose instead of the default pass-through: S corp or C corp. An S corp bypasses self-employment tax but taxes the owner as an employee. A C corp might appeal to a younger company because it allows stock to be claimed as an ownership investment. What kind of LLC do you have with Pacaso? Like John and Miguel in the example above, you’ll be part of a multi-member LLC if you choose to become a co-owner of a second home with Pacaso. Your Pacaso will be shared via a fully managed MMLLC specifically designed for co-ownership. When you’re ready to buy your second home, we’ll partner with you to purchase 1/8 of a home via a private, professionally managed multi-member LLC. This is called the Pacaso Home LLC. We take care of all the paperwork and find additional owners to purchase the other shares. Following closing, LLC co-owners (no more than eight per Pacaso Home LLC) each own respective membership interest(s) in the LLC, and the LLC owns the home. View our residential listings and see the benefits of owning a second home with Pacaso.

Co-﻿ownership 411

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Co-ownership 411