The Multi Member LLC - Build Bigger and Better with a Team

Limited Liability Companies receive liability protections similar to Corporations while paying taxes like Partnerships. 

Now, just to be clear, LLCs are NOT Partnerships or Corporations.

LLCs are their own officially recognized business entity and merely share certain aspects with these other business entities. 

There are two types of LLCs:

1. Multi-Member (MMLLC)
2. Single-Member (SMLLC)

The key difference between them is the number of owners. That’s all.

The Owners, or “Members”, as they’re sometimes called, share control over the business’s operations and influence in the decision-making process. 

Table of Contents

1. LLC Owners (Members)

2.Multi Member LLC Protection

3. Managing Your MMLLC

4. LLC Registration Requirements

5. How Does a Multi Member LLC File Taxes?

6. How to Pay Yourself from Your Multi Member LLC

7. LLC Maintenance

8. Is a Multi Member LLC the Best Business Entity for Me?

You want the business entity best suited for your personal and professional goals, right? 

To do this, you should understand what it means to operate as a Multi Member LLC. 

The number of members affects:

• The division of ownership between members 
• The available limited personal liability protections
• The structure of your LLC’s management hierarchy
• The registration requirements for setting up your LLC
• How taxes are paid by the LLC and its members
• The laws and regulations your LLC must follow

Don’t worry, all of these fundamentals (and more) are broken down in this article.

Going with a Multi Member LLC is great since it is tailored to fit your group’s personal and professional goals.

The Multi Member LLC is legally recognized in every state.

They are usually operated by families, married couples, groups of friends, and businesses where shared ownership makes the most sense.

Do you want to make life-changing decisions without knowing what you’re getting yourself into? 

If your answer is yes, stop reading.

Business Initiative wants you to know your options and all that comes with them, for better or worse, so you can take the initiative and begin actualizing your vision.

How else would you want to begin your journey to securing financial independence?

LLC Owners (Members)

In your Multi Member LLC, you can have as many members as you want. 

Believe it or not, members don’t necessarily have to be US citizens, US residents, or even people for that matter.

As long as one member is a person, other members can be people, organizations, groups, or even other business entities altogether. 

Each member’s share of ownership, profits, taxes, and influence in the decision-making process is proportional to their initial and continual contribution to the company unless otherwise specified in Operating Agreement.

All of the owners must agree on this BEFORE you begin registering your LLC with your state.

If you ever upgrade your LLC to an S-Corporation, you’re capped at 100 members and they all have to be people. (More on specialty tax setups later in this article)

Just because you can have 100 members with an S-Corp or 100,000 members with a standard setup, doesn’t me you should.

More members mean more division, and more division means a higher chance of disagreement and dispute within the LLC. 

Not only that, adding more members further complicates the taxation process and makes losing your LLC’s limited liability protection more likely.

All it takes is for one member to mess around with the finances for the protection of all members to be voided.

There is also an unusual case where a Single-Member LLC can have multiple owners.

This is only when there are two and they’re married to each other. Besides this special case, single-member LLCs can only have one owner.

If, God forbid, you and your spouse do this special joint SMLLC and it ends in divorce, the LLC itself will quickly become a highly sought-after asset (especially if it’s profitable). 

Even if only one of you owns the SMLLC, the other partner may be entitled to a portion of the profits or, in some cases, the whole business.

It all comes down to what the lawyers and the court decide given the situation. 

It’s easier if your business is a Multi Member LLC.

Each individual’s share of ownership is outlined in the Operating Agreement which is submitted to register your LLC.

In this case, the boundaries of ownership are clearly stated and less work has to be done to figure out who owns what.

Keep in mind, LLCs are some of the most versatile business entities out there.

It’s not just one way or the other.

You should use this flexibility to your benefit. 

For instance, all of the members could each form their own Single Member LLC and then collaborate from there.

You could even bundle these SMLLCs together under one Multi Member LLC. 

You can even be the sole owner of an MMLLC by including your marriage partner, a family member, or a friend as another member.

Setting it up as a Multi Member LLC, even if the other member isn’t heavily involved in the business, gives you added protection. 

If you or your share somehow become compromised, the other member still holds rights to the LLC. 

Before fully committing to going in on a Multi Member LLC together, it’s important to write out a plan of action in the event of a business dispute, personal dispute, divorce, or death.

Owners move in and out of the company according to the procedures detailed in the Operation Agreement.

The tricky thing here is the other person has to actually do something in the LLC.

They can’t just be a name on paper.

If this other member doesn’t hold an active role in the company and share in its ownership with you, your LLC is legally viewed as a Single Member LLC, not a Multi Member LLC. 

Sharing the responsibility of owning and operating the business should be a solution, not a problem.

Start your LLC with those who hold common professional goals, expectations, and purpose of what you are all working towards.

And, like all things, it’s got to be legit.

Multi Member LLC Protection

LLCs are distinguishable, stand-alone entities.

Meaning the business is a separate entity from its members.

The LLC’s protection exists because of this separation.

Today there’s hardly any legal difference between Single and Multi Member LLCs.

But, in the early 90s, when LLCs were brand new, states used to be concerned about the differences between them. 

Back then, it was more complicated. 

Some states didn’t recognize Single Member LLCs but accepted Multi member LLCs while other states accepted both types. 

This has little relevance nowadays.

An LLC is an LLC across the board.

It doesn’t make much difference whether you’re the only one running it or you’re running it with a group of like-minded entrepreneurs.

All fifty states (including D.C.) recognize Single and Multi Member LLCs as legitimate business entities.

In either setup, you receive the full extent of their legal and financial protections.

Your limited personal liability protection protects your personal property (and the personal property of all the other members).

A member’s protection is limited to their portion of the business.

Although MMLLCs are more complex than SMLLCs, they offer greater limited personal liability protection.

This protection exists because personal property finances are clearly distinguishable from the company’s property and finances. 

In the event your company catches a lawsuit or owes money in some way, courts and creditors can only take from what is owned by the LLC.

Since the members are viewed as separate entities from the business, they aren’t the ones “under attack”. 

Some states allow LLCs to be levied to pay off debts.

This basically means the state takes your business to pay off a debt that the business owes.

This is the purpose of an LLC’s protection in the first place. 

The state comes after the business and the business’s property instead of coming after your personal belongings.

This includes things like your real estate, vehicles, bank accounts, investments, and whatever else you own that’s worth anything. 

LLC members are also legally considered independent of one another.

Let’s say there’s a lawsuit or claim made against one of your LLC’s members.

Courts or banks can only take from that particular member’s investment in the company.

This is the beauty of LLCs and more importantly why Multi-Member LLCs offer greater protection than SMLLCs.

This extra protection comes in handy when a member files for bankruptcy.

Special Bankruptcy Protection

Should you ever find yourself filing for personal bankruptcy (chapter 7 or chapter 13), a Multi Member LLC protects you where a single member setup simply can’t. 

By declaring personal bankruptcy, you are essentially declaring the transfer of your membership interest in the LLC to the bankruptcy estate. 

In a Single Member LLC, the state possesses your relevant property and assets, since there are no other members.

This includes anything related to your LLC (even your personal protection).

If this happens, the state owns your business, has voting rights, and has the final say in all things having to do with your LLC. 

All of this depends, of course, on your state’s LLC laws and regulations.

However, with a Multi Member LLC, the remaining members still hold voting rights and authority over the business’s movements.

This cannot be done with an SMLLC setup since there are no other members.

If a member of your MMLLC declares personal bankruptcy, the state claims that member’s share of Distributions.

You and the remaining active members have the final say as to whether or not you’ll give additional control to a state trustee over the bankrupt member’s share of ownership in your company.

This includes the bankrupt member’s percentage of voting rights and ownership.

If you and the other remaining members don’t want the state to hold ownership and influence in your decision-making process, you’ll just redistribute the bankrupt member’s share proportionally amongst yourselves (or as stipulated in the Operation Agreement). 

To quickly summarize this whole bankruptcy thing, there are two outcomes: 

1. Filing for Bankruptcy in a Single Member LLC 

Your position and everything having to do with it is given to the state.

2. Filing for Bankruptcy in a Multi Member LLC 

The Distributions meant for the empty position are the only thing given to the state if the other members choose to deny a government trustee claim over your position in the LLC.

If your other members grant access to the Feds, they would also take your percentage of voting rights and ownership in the LLC.

Losing Your LLC’s Protection

The LLC’s limited liability protection is called what it is for a reason… 

It’s limited.

The protection offered by your MMLLC is only effective so long as you and the rest of the members separate personal finances from the business’s finances. 

Your protections become void if any member starts playing games with the money, like trying to avoid taxes for example. This is called Piercing the Corporate Veil. 

Another way you lose protection is if the LLC takes on so many loans or so much credit, that it becomes impossible to pay off. This is called Undercapitalization. 

If your LLC becomes undercapitalized, banks (or whoever your company owes money to) can take an LLC member’s personal property to pay back outstanding debts. 

By Undercapitalizing your LLC or Piercing the Corporate Veil, you forfeit all your limited liability protections.

But, these aren’t the only ways to lose them.

You can also lose your LLC’s protections if you or any other members participate in illegal activities, shady business practices, ignore your Operating Agreement, etc. 

When you lose your LLC’s protections the courts and banks can come and take personal property from every member.

You definitely don’t want that.

Just run an ethical, morally clean, legitimate, law-abiding company and you should be fine.

You should only worry about losing your protection if you try cheating the system instead of using the system and its various loopholes for your benefit.

Managing Your MMLLC

A Multi Member LLC gives you the flexibility to arrange the management hierarchy to best suit your business’s needs.

Since you’re sharing ownership with other members, you all have to decide together how you want the LLC managed. 

Your multi-member LLC will either be “Member Managed” or “Manager Managed”. 

Member Managed LLCs

In a Member-Managed LLC all, or some, of the members are actively involved in the business’s daily operations.

Your LLC is Member-Managed by default. For this setup, members are split into two groups. 

The first group of members is the management group which is actively involved in the company’s day-to-day operations.

The second group is the non-managing members who hold passive roles in the LLC and don’t deal so much with daily operations.

Managing members are directly connected to and have a better understanding of the daily tasks and movements within the business.

They can only sign off on less critical projects.

These members may also have a greater say in the decision-making process depending on the significance of their role. 

Non-managing members still hold influence in the LLC, they are just less directly involved in short-term decisions. 

You can make a special condition in your Operating Agreement giving managing members more influence in the decision-making process than the non-managing members.

Or, you can leave it as default and base the voting rights on everyone’s investment in the LLC. 

Do what works best for you, the other members, and your business.

Manager Managed LLCs

The other management option is to structure your MMLLC as Manager-Managed.

This approach is more common for Multi Member LLCs with a lot of owners. 

In this case, a manager or management team is hired specifically to oversee the business’s logistics and run the ship, so to speak.

Professional managers can be found through third-party management companies or through your typical application/interview process.

All the owners are passively involved in the operations of the LLC.

It’s great because everybody leaves the headache of day-to-day decisions to the hired manager(s).

Members still maintain ownership and voting rights in the LLC’s decision-making process.

If you want your company to be Manager-Managed you have to say so in your Articles of Organization (a document which is submitted when registering your LLC).

Voting Rights

Whichever management system you use, every owner must be included in the larger, more significant business matters.

These are issues concerning contracts, loans, restructuring, product/service updates, agreements, etc.

A majority agreement must be reached for any major decision to take effect.

If a consensus can’t be reached, you’ll refer to your LLC’s Operating Agreement to settle the disagreement.

The Operating Agreement details the procedures for different situations you may encounter while operating your LLC.

It also includes the management structure, the responsibilities of each member, each member’s share of voting rights, and many other important aspects of your LLC.

By following the procedures detailed in this document, you will be able to resolve confusion easily and make decisions effortlessly.

This just goes to show how important it is to have an organized Operating Agreement.

LLC Registration Requirements

Here is what you need to get together and complete to register your LLC:

• Articles of Organization 
• Registered Agent
• Operation Agreement
• EIN (Employer Identification Number)
• Business Bank Account
• Industry-Specific Licenses
• Employee Regulations
• Maintenance

➤ MORE: Click here to learn about each of these requirements

When all of these are in order you will be the proud operator of your very own LLC. 

How Does a Multi Member LLC File Taxes?

Multi Member LLCs are categorized as Partnerships for tax purposes.

Single Member LLCs are Disregarded Entities so they’re categorized as Sole Proprietorships.

In either case, your LLC is taxed according to the tax bracket of the owner(s).

The taxes are passed to owners individually. This is known as Pass-Through Taxation.

The Pass-Through Process

Pass-Through Taxation is the simplest, most straightforward way to pay taxes. It’s also the default taxation method unless your state says otherwise.

If you want something other than the default, you can say so in your Operating Agreement along with how you want to handle business profits.

Your LLC will probably use Pass-Through Taxation, at least initially. 

In this setup, you and the other members get paid proportionally to your percentage of ownership in the business.

The profits members receive are called Distributions.

The business’s taxes are “passed” on along with this payment. 

It is every member’s personal responsibility to pay the taxes for their Distribution. 

Taxes include, but are not limited to, Self Employment Tax (a combination of Social Security and Medicare taxes) and your Standard Federal, State, and Local Income Taxes (where applicable). 

Depending on what your business produces and sells, it may also have a quarterly Estimated Tax.

For more information on whether or not you are obligated to pay Estimated Tax refer to the IRS. 

Although Single and Multi Member LLCs both use this same process, taxation in a Multi Member setup has a few additional steps which are discussed below.

There are also other tax options you can start out with or upgrade to later.

You can gain unique advantages by combining LLCs or upgrading to a special Corporate Taxation. A few states actually make Corporate Taxation the default for LLCs. 

Upgrading really only becomes beneficial when your business makes significant profits consistently.

(Details about specialty tax setups are found at the end of the tax section)

Do your research, think things through, and speak with the experts.

Especially before changing your business’s tax status or doing anything with significant legal and financial ramifications.  

Married with an LLC

We can’t forget to mention this one special case scenario where you and your spouse both hold positions within the LLC and can have it treated as a Single Member LLC.

This is the only way a Single Member LLC can have two owners. Other than this one case, LLCs with two or more owners are MMLLCs. 

Alternatively, you and your spouse might prefer to file your tax returns separately.

In such a case where only one of you owns the LLC (Single-Member LLC), the owner may be in a higher tax bracket due to the business’s profits. 

If you’re married, you can avoid these higher taxes in one of two ways:

1. Both you and your spouse act as members in a Multi Member LLC 2. File taxes jointly as as SMLLC

Multi Member LLC Tax Forms and Payments (Partnership Taxation)

The tax process for Multi Member LLCs is a bit more complicated since the company files its own federal tax returns.

Members must first fill out a Schedule K-1 Form. 

The K-1  is an overview of what all members contribute to (or take from) the business.

Your K-1 determines your portion of profits and taxes. It also helps the IRS keep track of your company’s different owners.

Every member gives a copy of their K-1 to the LLC’s accountant.

The accountant uses the K-1s to fill out the 1065 Partnership Tax Form.

This is the same tax form Partnerships submit. 

Your Registered Agent or accountant attaches the K-1 copies to the 1065 and submits all of this on behalf of your Multi Member LLC. 

The original K-1s are kept either by the company or by the members.

Regardless, it’s good to file them away just in case the feds need records for whatever reason.

Enough about how the company pays its taxes… 

How do YOU pay taxes in a Multi Member LLC?

On the individual level, non-managing members pay Income Tax on their portion of profits.

You can easily figure your personal Income Tax Rate by referring to the Capital Gains Tax Rates chart for 2022:

Each member’s share of company profits is calculated using the K-1 mentioned earlier.

Members pay their relevant Income Tax using the classic 1040 Tax Form.

You’ve definitely used this form before if you’ve ever filed personal income taxes in the past. 

Managing members pay Self Employment Tax (the combo of Social Security and Medicare Taxes) using a 1040 SE form. 

Now, this Self Employment Tax only applies to members who are actually people.

Remember:

LLC members can also be other business entities or organizations.

Self-Employment Tax applies to guaranteed payments which you get paid for your active position in the company, which in this case is as a Manager. 

Here’s the whole MMLLC taxation process simplified: 

1. Members figure out their contribution to the business and inform the LLC. (K-1)

2. The LLC calculates every member’s share of profits to tell the government how much the total profits were and how much tax each member is responsible for paying. (1065)

3. Each member pays the relevant taxes on their share of business profits using their individual tax return (1040). The tax each member pays may vary because members pay based on their own tax bracket. 

Wherever you find yourself living and doing business, don’t let this crazy system stop you from gaining financial independence and freedom from the rat race.

Start your business with the right goal in mind and any obstacle will become insignificant relative to your vision. 

LLC Combinations

We mentioned earlier you can combine Single and Multi Member LLCs to your advantage. 

Let’s say, for example, you and some buddies own multiple real estate properties, each one under its own LLC.

Each of you can then make your own LLC with all of your Single Member LLC properties acting as additional members.  

After consolidating your properties, you and your associates can group your SMLLCs together, turning them into one big Multi Member LLC.

This simplifies the tax process even further since you get out of submitting tax returns for each individual property. 

If real estate is your LLC’s main source of profits you have to submit a special Schedule-E Tax Form alongside your 1040 Form.

How to Pay Yourself from Your Multi Member LLC

Getting paid from your MMLLC is as easy as transferring money from the business’s bank account to personal accounts.

What follows is a basic breakdown of this process.

➤ MORE: Here's a Step-by-Step Guide to Getting Paid

Your LLC is required to have its own business bank account in the first place.

Your LLC’s bank account is necessary for your legal and financial protections to be effective. 

Your LLC’s accountant pays Capital Distributions to you and the other members by moving profits from the business’s account to the personal accounts.

Capital Distributions and Share of Ownership are calculated based on your initial monetary contribution to the company and your involvement in the business.

This is all written in your Articles of Operation and your Operating Agreement which you submit during the registration process. 

Whether or not you keep your LLC as Default or upgrade it to an S-Corp, you will most likely get your money from the LLC using direct wire transfers or checks. 

If you upgrade and go the S-Corp route, you and the other owners get paid through a combination of Salaries and Dividends.

This slight difference complicates the payout process. 

Here’s how Salaries compare to Dividends when it comes to getting paid:

LLC Maintenance

When you’re established and actually running your business instead of setting it up, there are maintenance guidelines you have to follow.

If any of these requirements are neglected, your LLC protections will be voided. 

It’s standard protocol. 

• Keep your LLC’s licenses, member information, registration status, and taxes up to date. 
• File annual, and, in some states, quarterly reports to update the government on your business’s movements. 
• Hold regular meetings with the other owners of your Multi Member LLC to track your progress by reviewing financial records and other data like supplies, services, and clients. 
• Write things down clearly and make sure it’s organized. You want to be able to easily find important information many years from now.

Make sure to double-check your state’s business maintenance requirements as well as your own LLC’s requirements.

The success and longevity of your business rely on its organization.

You can get fined, sued, lose your protection, and potentially your entire business if you neglect your LLC. 

Properly maintaining your LLC gives you the opportunity to regroup, focus on your goals, and plan for the future.

This way you can make calculated decisions to optimize your time and your business’s profits. 

Is a Multi Member LLC the Best Business Entity for Me?

You want to be successful. 

Right?

Well, a big part of success is being financially independent. 

Starting your own business is your next logical step. 

But, before you make any legally binding decisions, take the time and compare your different options.

By understanding what’s available, you can begin your journey to financial independence on the right foot.

It may seem like a lot at first glance.

And you’re right, it is! 

But, as we have heard time and time again:

Knowledge is Power. 

There’s special knowledge and skills you need to gather before creating a business. 

Do you want to be making decisions with uncertainty and doubt?

No.

You don’t. 

Nobody wants that.

First, you have to know what it takes to start and run a business

Unless you are already familiar, learning about your options is the best way to take action.

Well, what’s the best way to learn about your options?

Ask questions, do research, and take some notes.

The information is easy to find if you look in the right places.

Lucky for you, Business Initiative has the information and connections you need to open your own Multi Member LLC or any other business entity. 

We cover the different aspects of various business entities and tax set-ups so you can choose the right combination to suit your personal and business goals.

Once you have a hold on the different entities, their taxes, advantages, and disadvantages… 

GO!

START!  

Right Now!

Do not hesitate to make moves and begin registering. 

It’s never too late until it’s too late so you better get on it.

You don’t have to do it by yourself either if you don’t want to.

There are plenty of companies in all 50 states specializing in helping entrepreneurs, like yourself, register LLCs and other business entities. 

Using these resources is the best thing you can do for yourself and your business.

After all, they register businesses for a living.

It speeds up the process and there is no confusion about which forms or licenses your need.

They know what to do. 

Helping YOU begin your journey to financial independence and monetary freedom is our mission. 

We are only successful if you’re successful. 

That’s why we give you the clarity to know what it takes to register for yourself. 

That’s why we connect you to the best registration services available. 

Do something with it!

Good Luck!

That being said…