Besides personal liability protection, flexibility is among the top reasons entrepreneurs choose the Limited Liability Company (LLC) business structure for their companies. An LLC can have an unlimited number of owners, called “members” (with few restrictions on who can be a member); an LLC can override its default tax treatment and opt for an S Corporation or C Corporation tax election (if it meets the IRS’s qualification criteria); and an LLC can be managed by the LLC’s members or one or more designated managers. These qualities make operating as a Limited Liability Company attractive to small and large businesses alike.
Let’s review some frequently asked questions about LLC members to help get you and your new business on the path to success.
Are LLCs Limited to 100 Members?
Most states allow single-member LLCs (with just one owner) and multi-member LLCs (with two or more members). A multi-member LLC’s membership is only restricted if the entity elects to be treated as an S Corporation for tax purposes. Per IRS rules, an S Corporation may have no more than 100 shareholders (or members in the case of an LLC electing S Corp tax treatment).
Keep Reading: Single Member LLC vs. Multiple Member LLC
Who Can Be a Member of an LLC?
The state where an LLC is formed dictates the rules for who may own it and other entity formation and compliance regulations.
Here’s who is allowed to be LLC members in most states:
- Adult individuals (U.S. citizens and non-U.S.-citizens)
- Other LLCs
- Foreign entities
Here’s who is not allowed to be LLC members in most states:
- Individuals under the age of 18
- Insurance companies
States’ rules vary, so I encourage you to check the specific regulations for your LLC.
Are Members of an LLC Considered Employees?
By default, an LLC is considered a disregarded entity for tax and legal purposes, and its members may not be company employees even if they perform work for the company.
This keeps tax reporting rather straightforward as all profits and losses flow through to members’ personal tax returns. However, one potential downside is that all of a member’s share of the profits is subject to self-employment taxes (Social Security and Medicare taxes).
In contrast, if an LLC meets the IRS’s eligibility requirements for S Corporation tax election, members who work for the LLC are put on the company payroll. Therefore, they only pay Social Security and Medicare taxes (FICA payroll deductions) on their wages and salaries. The profits paid to them as distributions are subject only to income tax, not FICA.
Keep Reading: How Do LLC Owners Get Paid?
How Do You Add Members to an LLC?
Adding Members to an existing LLC requires following the procedures in the LLC’s Operating Agreement (or the state’s rules if no LLC Operating Agreement exists) and updating any required documentation filed with the state.
Examples of possible documentation requirements when adding LLC members:
- Filing Articles of Amendment with the state to update the LLC’s registration records with the new members’ information.
- Adding the new LLC members’ information in the LLC’s Annual Report to the state.
- Updating foreign qualification paperwork (e.g., Certificate of Authority) with the new LLC members’ information (if the LLC operates in one or more states beyond its home state).
- Updating the LLC Operating Agreement to include the new members’ information and document changes in the members’ ownership percentages.
Tax considerations of adding members to your LLC:
- If a single-member LLC wants to add members, it will become a multi-member LLC.
- If a single-member LLC is taxed as a disregarded tax (i.e., it has not elected to be taxed as a C Corporation or S Corporation), it’s taxed as a Sole Proprietorship. Changing to a multi-member LLC means it will be taxed as a Partnership, which requires filing IRS Form 1065 (an information return).
- If a single-member LLC adds members in the middle of a tax year, two sets of tax filings will be required: one for the period of time the LLC was taxed as a Sole Proprietorship and one for the period of time the LLC was taxed as a Partnership.
What Are the Difference Between Members and Managers?
An LLC member is a person or entity with ownership interests in the company. They are responsible for reporting their portion of the LLC’s profits and losses on their personal income tax returns.
An LLC manager is an individual — either someone appointed (e.g., one of the LLC members) or a hired employee. A manager who is an employee of the LLC must report their wage and salary income from the LLC, but not the LLC’s profits and losses because they do not have an ownership interest in the company. (Note that if a member serves as the LLC manager, that individual may not be a company employee and pays taxes like any other member does.)
Most states consider an LLC member-managed unless otherwise stated in the company’s formation filing or operating agreement. Generally, a single-member LLC’s sole member will also be its manager. Multi-member LLCs may choose to be member-managed or manager-managed. In a member-managed LLC, the business owners actively participate in the day-to-day operations of the company as well as handle the bigger-picture strategic decisions. In a manager-managed LLC, the members handle higher-level management responsibilities and appoint or hire a manager to oversee the everyday operations.
Keep Reading: Member-Managed LLC vs Manager-Managed LLC
Do I Need an LLC Operating Agreement?
An LLC Operating Agreement is an essential legal document recommended for Limited Liability Companies of all sizes. States don’t require LLCs to have Operating Agreements, but they do require LLCs with Operating Agreements to comply with the policies and procedures documented within them.
A few of the significant details in a typical LLC Operating Agreement include:
- Names of LLC members
- Members’ ownership percentages
- Names of LLC managers
- How profits and losses should be distributed
- Annual meeting and minutes requirements
- Voting rights
- Dispute resolution process
- How to add new LLC members
- How to remove LLC members
- How to dissolve the LLC
All LLC members must sign the LLC Operating Agreement to approve it and make it effective.
It can be helpful to ask an attorney for guidance when creating an LLC operating agreement. To get a head start on writing one with all the necessary elements, consider ordering a customized LLC operating agreement online. That can save you time — and ultimately money — because the custom agreement is automatically generated using a proven template updated with your company’s specific details.
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