Multi-Member LLCs can be a great option for business owners looking for a more formal business structure than a Sole Proprietorship or Partnership.
In this article, we’ll explain Multi-Member LLCs, their tax options, and how to set one up.
What is a Multi-Member LLC (MMLLC)?
A Multi-Member LLC is simply a Limited Liability Company that has 2 or more owners (called “Members”).
There are no limits to the number of Members a Multi-Member LLC can have, unless the LLC elects to be taxed as an S-Corp.
In that case, the number of owners (called “shareholders”) can’t be more than 100.
Why should I start a Multi-Member LLC?
You should start a Multi-Member LLC if you:
- have a business with more than 1 owner
- want to protect the personal assets of the business owners, and
- want to limit the amount of liability the business owners would be exposed to in the event of a lawsuit.
LLCs protect your personal assets and limit your liability by being separate legal entities from their owners.
That said, LLCs aren’t separate tax entities.
What is a tax entity?
Simply put, a tax entity (also called a tax status or tax classification) is a collection of rules about how a business is taxed.
The tax classification options for Multi-Member LLCs are:
LLCs aren’t on this list of tax classifications because an LLC isn’t a tax classification. It’s solely a legal entity.
What is a legal entity?
A legal entity is a business structure that is considered to be separate from the business owner for legal purposes. A legal entity is also called a business entity.
Examples of legal entities include LLCs and C-Corporations.
Meaning, they aren’t considered to be separate from the business owner for legal purposes. Instead, they’re an extension of the business owner for legal purposes.
This means that if your business is sued, Sole Proprietorships and Partnerships don’t protect your personal assets, or limit your liability.
And a business with multiple owners operates as a General Partnership by default, unless you register it with the state as an LLC or Corporation.
Simply put, informal business structures like General Partnerships don’t protect your personal assets or limit your liability.
We recommend starting a Multi-Member LLC to give all of the business owners personal asset protection and limited liability protection.
Single-Member vs. Multiple-Member LLC
A Single-Member LLC is a Limited Liability Company that has a single owner.
And a Multi-Member LLC is a Limited Liability Company that has 2 or more owners.
Both types of LLC offer the same limited liability and asset protections.
How does an LLC with multiple owners work?
Profits from the LLC are split between the LLC Members. And usually each Member’s profit percentage is the same as their percentage interest in the company.
For example: Cha, Archie, and Riley own Charlie’s Chocolates, LLC. Each of the 3 members own 33% of the LLC, so each of the 3 Members will receive 33% of the profits.
That said, Multi-Member LLCs are flexible. You can choose to split the profits in a different way, and document it in your LLC Operating Agreement.
Your LLC Operating Agreement also records other information, like the names of all of the Members and rules for how the business is managed.
You have 2 options for how you can manage your LLC: you can have a Member-Managed LLC, or you can choose a Manager-Managed LLC.
In a Member-Managed LLC, the Members have the authority to make important business decisions, sign contracts, and manage your LLC’s day-to-day business operations.
In a Manager-Managed LLC, Members still have the authority to make decisions, but the day-to-day business operations are run by an elected Manager.
Read more in Member-Managed vs Manager-Managed LLC.
All LLCs protect the LLC Members’ personal income and assets. Personal asset protection is one of the primary advantages of forming an LLC.
The other two are limited liability, and pass-through taxation.
How does a Multi-Member LLC pay taxes?
Technically Multi-Member LLCs don’t pay the taxes on the business income. Instead LLCs have a benefit called “pass-through taxation”.
Pass-through taxation simply means that the tax-paying responsibility for money made by the Multi-Member LLC flows through to the LLC Members.
Said another way, the LLC Members file and pay taxes on the LLC income using a Partnership Return (Form 1065), and their personal tax return (Form 1040).
Federal Income Taxes
The Internal Revenue Service (IRS), taxes LLCs based on the number of Members in the LLC.
This means that by default, the IRS taxes:
- a Single-Member LLC like a Sole Proprietorship.
- a Multi-Member LLC like a Partnership.
What does it mean to have your Multi-Member LLC taxed like a Partnership?
Having your Multi-Member LLC taxed like a Partnership means the IRS taxes a Multi-Member LLC using the Partnership tax classification rules unless you tell them otherwise.
Said another way, the Internal Revenue Service taxes your LLC as a Partnership by default.
A Multi-Member LLC taxed as a Partnership has a tax benefit called pass-through taxation.
The Partnership tax classification means the business owners must file a 1065 Partnership Return with the IRS, then report their portion of the business income using their 1040 personal tax returns.
Here’s how it works:
Form 1065 helps the IRS determine how much of the business profits belong to each LLC Member.
And then the IRS issues Schedule K-1s to each of the LLC Members showing their portion of the profit.
Each LLC Member will use the K-1 to report their portion of the LLC’s profits on their personal tax return (Form 1040).
What is a 1065 Partnership Return for an LLC?
A 1065 Partnership Return is an informational tax return. Meaning, the form is just reporting information about the LLC’s income, and there’s no money due with this form.
Multi-Member LLCs taxed in their default status must file Form 1065 every year to tell the IRS how much money the LLC made, and how the business income is split between the business owners.
Then, the IRS sends Schedule K-1s to the LLC (or the LLC’s accountant).
Schedule K-1 shows the individual Members’ portion of the business income. And Members report their portion of the LLC income listed on K-1 using their personal tax return (Form 1040).
Form 1065 is submitted to the IRS by March 15, every year.
This makes sure that each Member of the Multi-Member LLC receives their K-1 early enough to include their portion of the LLC income on their personal 1040 tax returns (due by April 15).
Note: All Members must report their portion of that year’s profits on their annual personal tax return even if they don’t take money out of the business.
This is because the IRS doesn’t care how much money you took out of the business. They want to know how much business income you’re entitled to for that tax year, so they can tax it.
All of that having been said, you can also choose to have your LLC taxed like a C-Corporation, or an S-Corporation.
Taxing a Multi-Member LLC as a C-Corporation
A C-Corporation is both a tax status and a legal entity.
This means that you can form a C-Corporation with the Secretary of State, and you can choose it as your tax classification status.
However, it’s important to keep in mind that C-Corporations have double taxation instead of pass-through taxation. Meaning an LLC that has chosen the C-Corp tax election is taxed twice – once at the business level, and again at the individual level.
Choosing to have your LLC taxed as a C-Corporation is very uncommon. This option only makes sense for larger employers who are looking to optimize taxes on health insurance premiums for employees.
You can choose to have your Multi-Member LLC taxed like a C-Corp by filing Form 8832 with the IRS.
Taxing a Multi-Member LLC as an S-Corp
An S-Corporation is a tax status, but not a legal entity.
This means that you can’t form an S-Corp with the Secretary of State like you can with legal business entities like C-Corporations or LLCs. But you can choose to have the IRS treat your LLC like an S-Corp for tax purposes.
An S-Corp is simply a tax classification status that you can choose to use for filing business taxes with the IRS. And your home state will tax your LLC using the tax classification status you choose with the Internal Revenue Services.
For Example: Joey and Kasem own JK’s Joke Shop in Oregon. They form their LLC at the state-level with the Oregon Secretary of State’s office.
Then, they tell the IRS that they want JK’s Joke Shop, LLC to be taxed as an S-Corporation instead of being taxed in their default status (taxed as a Partnership).
This means that at tax time, Joey and Kasem will file and pay taxes for JK’s Joke Shop, LLC using the collection of tax rules called an S-Corp.
Choosing S-Corp tax treatment is uncommon for LLCs. That said, if your LLC makes more than $75,000 per year, you may benefit from only paying self-employment tax on their salaries and wages instead of their profit distributions.
You can choose to have your Multi-Member LLC taxed like an S-Corp by filing Form 2553 with the IRS. Under this tax treatment, the members will be taxed on their portion of the business income.
Important: We recommend speaking with an accountant and/or tax lawyer before changing your LLC’s tax treatment.
Keep in mind that changing your LLC’s tax treatment doesn’t mean that your LLC becomes that tax treatment. Instead, you can think of the tax treatment as a hat that sits on top of the LLC business structure.
For example: Ken and Alan own Surf’s Up, LLC. Their accountant has recommended that they choose the C-Corporation tax election, so they tell the IRS they want to be taxed as a C-Corp.
When their C-Corp tax election is approved, their LLC is still an LLC. It’s just treated like a Corporation for tax purposes.
State Income Taxes for Multi-Member LLCs
Good news! In most states that require individual income taxes, your state’s Department of Revenue will tax your LLC the same way that the IRS does.
Meaning, if the IRS is taxing you in your default status, the state will also tax you in your default status. Or, if you told the IRS to tax your LLC as an S-Corp, your state will also tax your LLC as an S-Corp.
That said, we recommend hiring an accountant. We know that choosing an accountant can be a pain, so we made you a list of accountant recommendations in all 50 states.
Registering an LLC for multiple owners
State laws allow a business to form an LLC with multiple owners.
Information requirements for forming a Multi-Member LLC
Your LLC formation documents require information that varies from state to state. That said, you’ll generally need the following names and addresses:
- the name and address of the LLC
- the names and addresses of everyone forming the LLC
- the name and address of the LLC’s Registered Agent
Setting up a Multi-Member LLC: Step-by-step
Here’s how to set up a Multi-Member LLC, step-by-step:
- Choose your LLC Name
- Choose your LLC Registered Agent
- File your LLC Articles of Organization
- Create an LLC Operating Agreement
- Get an EIN for an LLC
- Register for Business Licenses and Permits
- Register for and file LLC Taxes (like sales tax, business tax, etc.)
- File your LLC Annual Report
When you’re ready to set up your Multi-Member LLC, you can follow our step-by-step instructions on How to Start an LLC in all 50 States.
What is a Multi-Member LLC?: FAQs
Who can be an owner of an LLC?
A Multi-Member LLC can be owned by US citizens, non-US citizens, and non-US residents*. The same goes for Single-Member LLCs.
And the LLC Members (the owners) can be individual people, or they can be companies (like another Corporation or LLC). They can also be a legal structure like a Trust.
*Note: S-Corp shareholders (LLC Members) cannot be non-resident aliens.
What is the disadvantage of Multi-Member LLC?
The disadvantage of a Multi-Member LLC (MMLLC) is that MMLLC taxes can be more complex than the taxes for a Single-Member LLC (SMLLC).
This is because LLCs are taxed differently depending on how many Members are in the LLC.
An SMLLC owner simply files and pays taxes on their LLC’s income using their personal tax return (Form 1040).
MMLLC owners still file and pay taxes on their LLC’s income using their 1040 personal tax return. However, they must also file an informational return (Form 1065) a month before the 1040 tax filing deadline each year.
Form 1065 should be sent to the IRS by March 15th, so the IRS can issue forms called K-1s to the LLC for each of the Members.
The K-1s show how much of the LLC’s income each Member owns, and are required to report in their personal tax returns (Form 1040).
That said, if your business has 2 or more owners, you should form a Multi-Member LLC.
Is it better to be a Single-Member LLC or Multi-Member LLC?
Deciding whether it’s better to be a Single-Member LLC vs a Multi-Member LLC depends on:
- your specific company’s business and legal needs, and
- how many business owners there are in your company.
A Single-Member LLC is an LLC with one Member (owner). And a Multi-Member LLC is an LLC with 2 or more Members (owners).
- If there will be only one Member of your LLC, you should form a Single-Member LLC.
- If there will be 2 or more Members of your LLC, you should form a Multi-Member LLC.
Should a husband and wife both be Members of an LLC?
A husband and wife can both be Members of an LLC.
In fact, the most popular forms of Multi-Member LLC are husband and wife LLCs and friends/business partner LLCs.
Most states treat an LLC owned by a husband and wife the same way they’d treat any Multi-Member LLC.
That said, some states allow marital spouses to file and pay taxes on their joint LLC profits as a Sole Proprietorship.
This is called a Qualified Joint Venture.