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When structuring a business, there are several different types of business structures that you can look into. The major types of business structures include sole proprietorships, corporations, partnerships, and Limited Liability Companies (LLCs).
It is important to understand the differences between these types of business structures, like the differences between sole proprietorship vs. LLC. Then, if you decide that you want to go with an LLC, you will need to decide between a single-member LLC and a multi-member LLC.
Key Points
• A single-member LLC is owned by one person, separating personal assets from business debts while passing profits and losses through to the owner’s personal tax return.
• A multi-member LLC is owned by two or more people who share ownership, responsibility, and profits, and can be either member-managed or manager-managed.
• For tax purposes, a single-member LLC is a disregarded entity filing on Schedule C, while a multi-member LLC is treated as a partnership and must file Form 1065.
• Choosing a single-member LLC offers minimal paperwork and full decision-making control, but comes with limited growth potential and the possibility of greater IRS scrutiny.
• A multi-member LLC makes raising capital easier and allows shared responsibilities, but introduces more complex taxes, documentation requirements, and the risk of member disputes.
What Is a Single-Member LLC?
A single-member LLC is a limited liability company that is owned by one person, known as the member. A single-member LLC separates the owner’s personal assets from the business’s debts and obligations, which provides limited liability protection to the owner. Profits and losses are still passed through to the owner’s personal tax return.
What Is a Multi-Member LLC?
A multi-member LLC is a limited liability company that is owned by two or more individuals, known as the members. The members share ownership, responsibility, and profits of the business. Members can include individuals, corporations, other LLCs, partnerships or foreign entities.
Each member contributes capital, expertise, or labor and has a stake in the company’s operations and decision-making. There is generally no maximum number of members for a multi-member LLC.
Single-Member LLC vs. Multi-Member LLC: How They Compare
Before filing the LLC articles of organization and starting a business, you should decide what type of LLC makes the most sense for your situation. Some examples of differences between a single-member LLC and a multi-member LLC include ownership and management, tax treatment, and formation and ongoing requirements.
Ownership and Management
A single-member LLC has one owner who has full control over decisions, operations, and financial management. A multi-member LLC involves two or more owners who share responsibility. A multi-member LLC can be member-managed (where all members have a say) or manager-managed (where one or more designated members handle daily operations).
Tax Treatment
While there are LLC tax benefits, the IRS treats single-member LLCs and multi-member LLCs differently from a tax perspective. A single-member LLC is considered a disregarded entity for tax purposes. The owner reports business income and expenses directly on Schedule C of their personal tax return (Form 1040). A multi-member LLC is considered a partnership for tax purposes. A multi-member LLC must file Form 1065. Each member reports their share of income or loss in a Schedule K-1.
Single-member LLCs and multi-member LLCs can choose between being taxed as an S corporation or as a C corporation.
Formation and Ongoing Requirements
A single-member LLC is formed, owned, and managed by one owner, while a multi-member LLC is formed, owned, and managed by two or more owners. A single-member LLC also has less paperwork and a less formal structure, while a multi-member LLC has a more formal structure to uphold.
Pros and Cons of Each LLC Structure
There are pros and cons of an LLC as a single-member LLC and as a multi-member LLC.
The pros of a single-member LLC include minimal paperwork, simple setup, simple filing, and full decision-making control. However, the cons include limited growth potential, the possibility of more IRS scrutiny, and sole responsibility for successes and failures.
The pros of a multi-member LLC include more formal structure (which might appeal to investors), an easier time raising capital, and shared responsibilities and skills. Cons of a multi-member LLC include a risk of disputes between members, more complex taxes and documentation, and a strong operating agreement.
Which LLC Structure Is Right for You?
When choosing between a single-member LLC and a multi-member LLC, you should consider your business model and future goals. If you are starting a business alone and don’t plan to bring on partners, and also want simplicity and full control of the business, a single-member LLC may be a better fit.
If you are starting the business with a co-founder or partner and want to share responsibilities or investments, or you plan to scale the business with multiple stakeholders, you should consider a multi-member LLC. You can always start as a single-member LLC and convert to a multi-member LLC later.
The Takeaway
When deciding between a single-member LLC and a multi-member LLC, there are more things to consider than just how many owners you have. You should also think about how you want to run your business, how you will manage taxes, and what your plan for future growth of the company is. Both single-member LLCs and multi-member LLCs offer protections and flexibility. No matter the structure, any type of corporation is eligible for small business loans, small business checking accounts, and a business credit card.
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FAQ
Can a single-member LLC become a multi-member LLC?
Yes, a single-member LLC can become a multi-member LLC by adding one or more members. This will change the LLC’s legal and tax status.
How are multi-member LLCs taxed by default?
Multi-member LLCs are typically taxed as partnerships by default. When taxed as a partnership, the LLC itself does not pay federal income taxes. Instead, profits and losses are passed through to the individual members, who report them on their personal tax returns.
Does a multi-member LLC need an operating agreement?
A multi-member LLC operating agreement is between the members (owners) of a company that establishes its ownership and day-to-day operations. The document outlines the partnership between the owners. While not always legally required, a multi-member LLC should have an operating agreement to limit disputes between members.
Can a married couple form a single-member LLC?
A married couple can own a single-member LLC in two situations. The first option is to put only one spouse on the LLC as its sole member. The other option is to live in a community property state, where both spouses are allowed to co-own the LLC and still have the IRS treat it as a single-member entity for tax purposes.
What happens to a multi-member LLC if one member leaves?
The outcome of what happens to a multi-member LLC if one member leaves depends on the LLC’s Operating Agreement. The Operating Agreement may include certain requirements or details, like a notice period of the departing member, how buyout of the departing member’s ownership interest is handled, and procedures for amending membership records.
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