In 2020, 2.8 million single-member LLC returns were filed, which is a huge increase from just 126,000 in 2001. Considering that they make up almost 10% of the total non-farm sole proprietorship returns, it stands to reason that operating an LLC solo is doable. However, a multi member LLC can offer different advantages for those considering a collaborative business structure.
However, “doable” doesn’t mean “feasible” in the long term. If you’re currently running an LLC on your own, then perhaps it’s time to think about adding other members. That way, you can diffuse responsibility and decrease stress.
As you might’ve already guessed, a multi-member LLC operates differently, both on paper and in practice. Here are the important things you need to know regarding this business structure.
Single-Member LLC vs. Multi-Member LLC
At face value, these types of limited liability companies (LLCs) may seem very similar, or even identical to some (besides the difference in member numbers). However, there are some essential nuances you should be aware of.
Single-Member LLC
A single-member LLC is owned by a single individual or entity. Typically, this means that the single member has full control over the management and operations of the LLC. This makes the management structure simpler, and it has more flexibility, as decision-making is centralized.
As the name suggests, an LLC provides limited liability protection for the sole member. They’re not personally responsible for the LLC’s debts.
For taxes, the company is treated as a “disregarded entity” by default. Profits and losses are both reported on the owner’s personal tax return, which is Schedule C of Form 1040.
Multi-Member LLC
A multi-member LLC is owned by two or more individuals or entities that can have varying ownership percentages.
The business can be either member-managed or manager-managed. In the former, all members participate in daily operations; in the latter, they appoint one or more managers to handle operations for a more hands-off approach to business.
Either way, decision-making might be more complex because there are more owners involved. To help mitigate this, the operating agreement should clearly outline roles, responsibilities, and decision-making processes.
In this LLC structure, all members still get limited liability protection. This means that generally, they won’t be responsible for the LLC’s debts either.
Are you wondering, “how is a multi-member LLC taxed?” Well, the LLC is treated as a partnership by default.
However, members can elect their business to be taxed as a corporation if they wish. Otherwise, like with a single-member LLC, profits and losses are reported on the members’ personal tax returns.
Can You Change a Single-Member LLC to a Multi-Member LLC?
Yes, you can change your single-member LLC to a multi-member one. You should have details for the procedure in your operating agreement, but if you don’t, don’t worry. In this case, you should follow the laws in your state for adding more members.
How to Change a Single-Member LLC to a Multi-Member LLC
As we’ve just said above, you can change your LLC structure by following the procedure outlined in your operating agreement. Otherwise, make sure to create one before adding other members for your own protection, and take the following steps.
Draft an Amended Operating Agreement
If you already have an existing operating agreement, you’ll have to amend it to reflect the change in ownership structure. You should clearly outline the roles, responsibilities, and ownership percentages of each member.
Express Consent as the Former Sole Existing Member
In general, changes in an LLC require the unanimous agreement of all members. But because you’re the sole owner, you can give written consent for the LLC to change to a multi-member one.
File Necessary Forms With the State
Check with your state’s business regulatory agency, which is usually the Secretary of State’s office. They’ll tell you the specific filing requirements for amending the membership structure of your LLC.
You’ll file the necessary forms, which may include an amendment to the articles of organization or a similar document.
Update Your Tax Information
If you obtained an employer identification number (EIN) for your LLC, then you’ll need to update the information with the IRS. This may involve submitting Form SS-4.
In addition, review and update any tax reporting forms to reflect the new structure. You might have to close your accounting books and records if you’ve been paying taxes on the LLC as a sole proprietorship too, so consult with a tax professional to make sure everything’s done correctly.
Update Your Bank Accounts and Contracts
Next, update your LLC’s bank accounts, which may involve informing the bank of the company member changes and providing updated documentation. You should also review and update any existing contracts, agreements, or licenses that may need to be amended.
Communicate Changes With Stakeholders
It’s a good move to inform the LLC membership changes with all stakeholders so they feel like you’re being transparent. Communicate with vendors, clients, and any other parties involved with the business to ensure a smooth transition.
How to Form a Multi-Member LLC
Forming a multi-member LLC is pretty much the same as forming a single-member one, which means you can follow our handy LLC formation checklist. Generally speaking, you’ll have to:
- Perform a name availability check
- Reserve a business name
- Choose a registered agent
- Prepare and file articles of organization
- Prepare an operating agreement
- Get an EIN
- Obtain business licenses and permits
- Open a business bank account
- Get insurance
Is a Multi-Member LLC Right for You?
Venturing out on your own in the business world usually means that forming an LLC is the most solid option. You can always choose to go solo, but having a multi-member LLC can mean better distribution of responsibilities.
Even if you already have a single-member company, the beauty of LLCs is their flexibility. As a result, you can smoothly change business structures and add members as you see fit. This means that you can scale your company whenever you wish, which can be cost-effective in the long run.
Multi-Member LLC FAQ
1. What’s the difference between a single-member LLC and a multi-member LLC?
A single-member LLC is owned by one person or entity and is generally treated as a disregarded entity for tax purposes, meaning profits and losses are reported on the owner’s personal return.
A multi-member LLC has two or more owners and is, by default, taxed as a partnership, with profits and losses passed through to each member’s personal return.
2. How is management structured in a multi-member LLC?
You can choose between two management models:
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Member-managed: All members participate in daily operations.
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Manager-managed: One or more designated managers (who may or may not be members) handle operations, while other members remain more passive.
3. Can a single-member LLC become a multi-member LLC later?
Yes. You can add members by updating your operating agreement to reflect new ownership and responsibilities. You’ll also need to file the necessary amendments with your state and update your tax classification with the IRS if required.
4. How is a multi-member LLC taxed?
By default, a multi-member LLC is treated as a partnership, with profits and losses passed through to members, who report them on their personal returns using a Schedule K-1. The LLC can also elect to be taxed as an S corporation or C corporation by filing the appropriate forms.
5. What are the main benefits of forming a multi-member LLC?
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Liability protection for members’ personal assets
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Flexibility in ownership and management structures
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Pass-through taxation by default, with the option to elect corporate tax treatment
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Ability to attract investors and partners by offering ownership interests
6. What are the potential drawbacks of a multi-member LLC?
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Decision-making can be more complex with multiple owners
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Tax filings are more complicated, requiring a partnership return (Form 1065) and issuing Schedule K-1s to each member
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Potential for conflicts if roles and responsibilities are not clearly defined
7. How do you protect members and the business when forming a multi-member LLC?
The most important step is drafting a comprehensive operating agreement. This document should outline management rights, capital contributions, profit distribution, dispute resolution, and what happens if a member exits the business. A well-crafted agreement helps prevent conflicts and strengthens the LLC’s legal standing.
