Multi-member limited liability companies (MMLLC)

A limited liability company (LLC) is the most common type of business entity that allows owners to keep their personal assets legally separate from the company’s assets. An LLC that has multiple owners, known as the LLC members, is called a multi-member LLC. 

What is a multi-member limited liability company?

A multi-member LLC (MMLLC) is an LLC that is owned by multiple people. There is no limit to the number of members an MMLLC can have. The MMLLC structure provides limited liability protection to the LLC members.

Limited liability protection means that members are only liable up to the amount of capital the member invested, and their personal assets are otherwise shielded from any debts or liabilities incurred by the LLC. The only exception is when the liability spawns from the member’s own misconduct or fraud.

Types of multi-member LLCs

Multi-member LLCs can come in many shapes and sizes, and they can have many different management structures and tax classifications. Although the default tax classification of a multi-member LLC is a partnership, a multi-member LLC can also elect to be taxed as a C-corporation or an S-corporation. Unless stated otherwise, this article assumes that the MMLLC is taxed as a partnership.

At a high level, most MMLLCs can be divided into two categories: member-managed LLCs and manager-managed LLCs. 

In a member-managed LLC, each of the members plays a role in the company’s day-to-day operations. This structure is more common for LLCs where there are only a handful of members and all members want to be involved in the company’s strategy and operations. 

In a manager-managed LLC, the company appoints one or more managers (who may or may not also be members) to handle day-to-day operations. This business structure is more common when some members of the LLC want to play a more passive role in strategy and operations. 

Single-member LLC vs. Multi-member LLC

An LLC with just one business owner is called a single-member LLC. In most cases, the legal treatment of an LLC is the same whether it has multiple members or a single member. 

One slight difference between the two is related to taxation. Multi-member LLCs usually opt to be taxed as pass-through entities, while single-member LLCs are treated as disregarded entities for tax purposes. Under both tax treatments, the LLC member or members pay any LLC-related taxes through their personal income tax returns, rather than the LLC paying taxes itself. Hence the term “pass-through” to describe these entities, because the taxes pass through the entity level and instead occur at the member level. The outcome is typically the same, but multi-member LLCs and single-member LLCs get there in different ways.

How to change a single-member LLC to a multi-member LLC

Since a single-member LLC and a multi-member LLC are simply two variants of the same type of business entity, a single-member LLC does not need to convert its legal structure if it is adding a new member or members to its ownership. That said, a single-member LLC may need to take several steps if it is becoming a multi-member LLC:

• Update the operating agreement: The company should amend its existing operating agreement to include any new members, including their ownership percentage and any other rights or responsibilities. 

• Update state filings: The company may need to amend its Certificate of Formation or other LLC formation documents with the state in which it is incorporated to reflect any ownership changes. 

• Consider tax implications: A single-member LLC becoming a multi-member LLC might need to obtain a new federal tax ID, especially if it was previously operating without one. LLC members should consult with a tax professional or accountant to understand this and other potential consequences for taxes. 

Multi-member LLC vs. general partnership

A multi-member LLC and a general partnership are two common ways to structure a new business with multiple owners. Here’s a breakdown of how these two types of entities compare and contrast:

Multi-member LLC vs. C-corporation (C-corp)

A corporation is another common type of legal structure for a business with multiple owners. While both multi-member LLCs and corporations come in many different forms, in general, the corporation structure is more common among venture-backed businesses. Corporations are taxed as C-corps by default, unless the corporation elects otherwise. Here are some other key similarities and differences between LLCs and C-corps:

→ Learn more about converting your LLC to a corporation

Forming a multi-member LLC

MMLLCs can come in different forms and have different management structures. In most cases, a specific operating strategy is outlined in a multi-member LLC’s operating agreement, a legal document that outlines key details related to ownership, management, and governance. 

While an operating agreement is typically not legally required, most LLCs choose to implement one in order to define their operational framework and avoid future disputes between members. The operating agreement is usually created at the time of the LLC’s founding and may be amended in the future with the consent of the members. 

The Articles of Organization are another important governing document for MMLLCs. In every U.S. state, a new LLC is required to file Articles of Organization or a similar LLC formational document in order to register the company’s name, address, business purpose, and other basic information. 

How to pay yourself as a multi-member LLC

The members of a multi-member LLC have a few different options for how to compensate themselves for their work. It’s important for an MMLLC to maintain records of all types of payments to members for tax purposes. Due to the variability in structure and tax classification, LLC members should consult with a tax professional or accountant to determine the most appropriate way to get cash out of the business.

Multi-member LLC taxes

As mentioned above, the default tax classification of a MMLLC is a partnership and therefore most MMLLCs are taxed by the IRS as pass-through entities. This means that any profits from the business are passed through to the members and treated as personal income, with the members paying any tax on their share of the profits through their personal income tax return. 

MMLLCs can also file an election to be treated as a C-corporation for tax purposes. With a C-corp tax designation, the MMLLC is no longer entitled to pass-through taxation and the company pays corporate taxes on any profits.

Form 1065 partnership tax return

Form 1065 is the tax return filed annually by the LLC with each member’s Schedule K-1 attached. The 1065 is how the IRS verifies that the information on the K-1s submitted by members on their individual tax returns is correct. 

Schedule K-1

Each member will receive a Schedule K-1 from the LLC that they must use to report their share of the LLC’s income or loss on their personal tax return. 

→ Read our 2024 guide to business tax deadlines for corporations and LLCs