Limited liability companies (LLCs) are a popular option for people who want to launch a business while protecting their personal liability in case the company fails. If you’re going into business on your own, a single-member LLC is the clear choice.
However, you may wonder whether you can open an LLC jointly if you have business partners. The answer is yes. Here’s what you need to know about the two options and which type of business is right for you.
What is an LLC?
LLC stands for limited liability company. It’s a legal structure you can use to register a business entity when filing formation documents with your Secretary of State. Forming an LLC can make your business appear more professional and offers some personal asset protection against liabilities incurred by your company.
How do single-member LLCs and multi-member LLCs compare?
Single and multi-member LLCs are similar in that they’re both business structures that provide some asset protection for owners. However, there are a few differences in how they operate.
To form an LLC, you must file Articles of Organization with your state government and pay any required filing fees. You’ll set up business bank accounts under your business name, apply for business licenses and write up an operating agreement that describes how you’ll run the business. You’ll also want to ensure you comply with the state laws in your location.
The Articles of Organization will note each of the LLC’s owners, also called members. If you’re the sole owner, you’ll form a single-member LLC. If there are multiple business owners, you’ll form a multi-member LLC.
Multi-member LLCs must get an Employer Identification Number (EIN) from the IRS.
One of the key reasons to form an LLC is that it offers limited liability protection. If you manage your LLC properly and keep your personal and business funds separate, you receive protection from the debts and liabilities of your business.
Single-member and multi-member LLCs offer this liability protection. Both are distinct legal entities from their owners.
There are some scenarios where owners can be personally liable for the LLC’s debts. With a multi-member LLC, you must trust the other members to handle the business properly. If they commit fraud or break other rules, they could be liable for the LLC’s debts. In this scenario, other members could also face personal liability.
Trusting your partners is essential since their actions could impact your personal assets.
Tax treatment is one of the main places where single-member LLCs and multi-member LLCs differ.
A single-member LLCs can be treated as disregarded entities for tax purposes. This means that the business doesn’t have to file its own tax return. Instead, like a sole proprietorship, the LLC’s income passes through to the personal tax returns of the member. The member has to file Schedule C for sole proprietor income when they file their annual federal tax return.
Multi-member LLCs, by default, are treated as partnerships. Partnerships must file an annual information return and an annual report of their financial activity. However, they don’t pay taxes at the business level. Like single-member LLCs, partnership income passes through to the owners’ personal tax returns.
Single-member and multi-member LLCs can both elect to be taxed as an S Corp. For a multi-member LLC to be eligible for an S Corp tax election, it must have no more than 100 members.
Electing to be taxed as an S Corp offers some tax advantages. For example, after the LLC pays its members a reasonable compensation, the remaining profits can be distributed to members rather than paid as wages. Those distributions are not subject to self-employment taxes, helping the LLC’s members save money. This can be beneficial for tax purposes.
Management and ownership
When you form an LLC, you’ll file Articles of Organization and write up an operating agreement. Your Articles of Organization will list all of your LLC’s members, also known as owners. If it’s a single-member LLC, you’ll be the only owner. For multi-member LLCs, each member will have an ownership stake.
One of the main differences between these two structures is that two or more people cannot own a single-member LLC, unless you’re married in a community property state, and a single person cannot own a multi-member LLC. But a single member LLC can be treated as a partnership if it chooses.
When managing either type of LLC, you can opt to have it be member-managed or manager-managed. A member-managed LLC is one where all of the LLC’s members run the business. The majority of the LLC’s members must agree on contracts, loans and other significant decisions regarding the company’s direction.
With a manager-managed LLC, the members hire a person to serve as the company manager. The manager can be one of the LLCs members or a third party that isn’t an owner of the company. The manager runs the business on a day-to-day basis. Members who aren’t managers can still participate by making high-level decisions about the company’s direction or only serve as silent investors.
An LLC operating agreement is essential for outlining the management of the LLC. Your operating agreement can state each person’s role and responsibilities within the business and describe the decision-making process that the company will use.
It can also include information about how the LLC will handle members leaving the company, whether by selling their stake or dying, the LLC’s potential dissolution and how to mediate disagreements between members.
Compensation in a single-member LLC is relatively straightforward. The company’s income passes through to the member’s personal income tax return. If the LLC is an S Corp, the single member receives a reasonable wage and can take the remaining profits as distributions.
For a multiple-member LLC, the business’s income passes through to each member’s income tax return based on their ownership stake. When you submit Articles of Organization and create an operating agreement, you’ll want to note each member’s ownership interest.
For example, imagine Jane Doe and John Smith LLC is a multi-member LLC that brought in $200,000 in profit last year. Jane owns 70% of the company and John owns 30%. $140,000 (70% of $200,000) would pass through to Jane’s personal income taxes, and the remaining $60,000 would pass through to John’s.
Things get more complicated if the multi-member LLC opts for an S Corp election.
Any member involved in the S Corp’s daily operations must be on the payroll and receive reasonable compensation. Not every member has to take an active hand in running the company, so not every member must be on the payroll.
After each member actively working for the LLC gets paid, the owners and working members receive the remaining profit. Each owner’s distribution depends on their ownership interest in the LLC.
This can result in members with smaller ownership stakes but an active role in the daily operations of the business receiving more from the LLC than silent investors if their wage is large enough.
Which is right for you?
When choosing between a single-member LLC and multi-member LLC, it is important to consider your business goals and the complexity of business structure. If you don’t want to be in business with other people and dont’t want separate business tax filings, a single-member LLC is the choice for you. On the other hand, if you’re going to be regularly working with other people and want a more formal structure, a multi-member LLC is the right choice.
Before choosing either option, consider the pros and cons of partnering with someone else and the required business structure.
TJ Porter is a freelance writer based in Boston, Massachusetts. He began covering finance while earning a degree in business at Northeastern University in Boston, Massachusetts and enjoys writing about credit, investing, real estate topics. When he’s not writing, TJ enjoys cooking, sports, and games of the video and board varieties. You can contact him at find more of his work at TJPorterWriting.com