Understanding multi-member LLCs
How multi-member LLCs operateMulti-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 taxedMMLLCs 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 LLCsBecause 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 LLCMulti-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 examplesHere 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.
TakeawaysIn 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.