What is a Multi-Member LLC?

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A multi-member LLC, also known as a MMLLC, is a limited liability company (LLC) with more than one member.

Understanding multi-member LLCs

Limited liability companies are one of the most popular business structures in the United States. They’re used frequently because of their simplicity and because they capture the best characteristics of both partnerships and larger corporations.Multi-member LLCs and single-member LLCs operate almost identically. Like single-member LLCs, MMLLCs grant limited personal liability to their members. This concept was borrowed from corporate business structures and ensures that members’ personal assets are protected if the LLC is threatened with a lawsuit. 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. That 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. Multi-member LLCs are a common choice for shared business ventures. Family businesses, co-owned companies, married couples and individuals sharing property gravitate to this structure because it protects all related parties from business expenses or debts. Example: 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.

Takeaways

In short, a multi-member LLC has:

No limit on how many members can join
Multiple owners that contribute to how the business runs
Personal liability protections, just like single-member LLCs
A different tax reporting form

In more detail:

Who can form a multi-member LLC?The LLC business structure can be formed by almost anyone. 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. 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. 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. A major con is that MMLLC members’ actions can affect one another. If one member participates in fraud or gets lax in their bookkeeping, other members can be liable for their mistake. 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 some other options, too — two different tax classifications: 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?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.

Understanding multi-member LLCs

Takeaways

In more detail:

What is tenancy in common?

What is considered a second home for tax purposes?

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