Although the primary difference between a Single-member LLC (SLLC) and a Multi-member LLC may be obvious (the first has one owner and the second has two or more), these variations of the Limited Liability Company business structure have other nuances to consider. They share many characteristics, but there’s more than just the difference in the number of owners to ponder when deciding whether one or the other might be a good fit for your business.
Choosing between a Single-member LLC vs. a Multi-member LLC or other business entity type involves thinking about:
- Personal Asset Protection
- Income Tax Treatment
Because the entity type affects so many critical aspects of starting and running a business, it’s essential to research the pros and cons of each and ask for advice and direction from an attorney and an accountant or tax advisor.
Key Considerations When Deciding Between a Single and Multi-Member LLC
Every state in the United States allows for the formation of the Limited Liability Company business structure. Whether Single-member or Multi-member LLCs, most states allow the following entities to form an LLC:
- S. citizens
- Non-U.S. citizens
- Non-U.S. residents
- Another LLC or Corporation
Single-member LLC Ownership – A Single-member LLC has one owner (member) who has full control over the company. The LLC is its own legal entity, independent of its owner.
Multi-member LLC Ownership – A Multi-member LLC has two or more owners (members) that share control of the company. The LLC is its own legal entity, separate from its owners. There may be an unlimited number of members in a Multi-member LLC (unless it elects for S Corporation tax treatment, which allows for only 100 or fewer). The LLC may decide on how (what percentage of) profits and losses will be distributed among its members.
Depending on the situation, either option will have advantages and disadvantages. The number of owners in and of itself may not indicate the ideal choice. Sometimes, single business owners find it more beneficial to form a multiple-member LLC (for example, by making a spouse or other relative an additional member). And in some circumstances, multiple owners find it’s best to create one or more Single-member LLCs.
A Single-member LLC has one member, who is also considered the manager. Owners of a Multi-member LLC, however, must decide if they would like the business to be member-managed or manager-managed.
- Member-managed LLC – All of the LLC’s members participate in the work of the business. The company must have majority approval of all of its members when entering contracts, securing loans, and making other significant decisions. States will consider an LLC to be member-managed unless its formation documents specify otherwise.
- Manager-managed LLC – Members agree on a manager, either a particular member or members of the LLC or a third-party, to whom they give authority to manage the day-to-day operations and decisions of the business. Any members that are not in a manager role typically make higher-level, strategic decisions, or they might act as passive owners with just a financial investment in the company.
Regardless of whether an LLC is single-member, multi-member and member-managed, or multi-member and manager-managed, it’s essential to have an operating agreement in place. An operating agreement, although typically not required by a state, helps ensure all owners are on the same page about how the business should be operated and what are each individuals’ roles, responsibilities, and decision-making authority. An LLC operating agreement also spells out what should happen in the event of members leaving (or dying), dissolving the company, or disagreements among members.
3. Personal Asset Protection
Both the Single-member LLC and Multi-member LLC protect owners’ personal assets. Because the LLC is a separate legal entity from its members, owners’ personal property is insulated from the liabilities related to the business conducted by the LLC. So, if someone sues the LLC or the business cannot pay its financial debts, LLC members generally don’t have to worry about losing their personal assets (such as a home, car, bank accounts, retirement savings, etc.) beyond the extent of their investment in the company.
Realize, owners might be held personally responsible in some situations. For example, owners’ finances and personal property might be at risk if:
- A member has committed fraud or other illegal business activities.
- A member has done anything (like co-sign or guarantee a business loan) to compromise the line of separation between the business and personal transactions.
- A member has not managed the LLC according to the operating agreement.
4. Income Tax Treatment
For federal income tax purposes, by default, a Single-member LLC is treated the same as a sole proprietor, and a Multi-member LLC is treated as a partnership.
In either case, the LLC’s profits and losses pass through to its owners.
Single-member LLC Default Tax Treatment – An LLC’s owner reports the business’s profits and losses on Schedule C of IRS Form 1040, and the business does not report or pay taxes independently. The LLC owner must also pay self-employment taxes (Social Security and Medicare) on all taxable income from the business. Income taxes are usually paid via quarterly estimated tax payments. Other fees, such as franchise fees, that LLCs must pay, as well.
Whether Forming a Single-member LLC or Multi-nember LLC, the steps are similar:
- Choose a business name – CorpNet’s free business name search and trademark search tools can help verify if the desired name is available.
- Apply for an EIN (Employer Identification Number) – All LLCs must have an EIN, whether or not they will have employees. The IRS issues them for free, and CorpNet can help businesses complete the form to obtain one.
- Designate a registered agent – An LLC must appoint a registered agent to accept legal paperwork and important government notices on behalf of the LLC. The registered agent must meet several requirements, including having a physical address in the state where the business is registered. CorpNet offers registered agent services in all 50 states.
- File Articles of Organization with the state – This document and a filing fee are required to legally register an LLC in the state that will be home to the business. Information requested and fee amounts vary by state. CorpNet’s filing experts will help ensure paperwork is completed and submitted accurately.
- Complete Entity Classification Election Form (IRS Form 8832) – To determine the LLC’s tax status. If electing S Corporation tax treatment, IRS Form 2553 must be completed. CorpNet can handle this paperwork, as well.
- Create an operating agreement – Although not required by states, the LLC operating agreement is a critical document that sets the rules for how the LLC will be run, who has what authority and responsibilities, how profits will be distributed, how disagreements among members will be settled, and more. Even Single-member LLCs should consider having an operating agreement; it can help support the LLC’s limited personal liability status in the event of a lawsuit by demonstrating separation between the owner and the business.
- Open a business bank account – Setting up a dedicated bank account for the LLC is a crucial step to ensure the business maintains “the corporate veil” that helps shield LLC members’ personal assets from liabilities of the company.
- Obtain the necessary business licenses and permits – Depending on the type of business an LLC conducts and where it’s located, different business licenses and permits may be needed to operate legally. CorpNet can help identify the requirements and complete the applications. It’s also helpful to consult the Secretary of State office, county, and municipality to verify the requirements.
- Know and abide by hiring and employment laws – An LLC that has employees must follow employment-related rules and submit mandatory reports at the federal, state, and possibly the local level.
- Learn what is required to stay in good standing – On an ongoing basis, an LLC must stay up to date with all required business compliance formalities. More on this below.
Both Single-member and Multi-member LLCs have business compliance tasks that they must complete to maintain their business entity and the personal liability protection that it provides. Generally, a Single-member LLC will have less-complex requirements to fulfill than a Multi-member LLC. LLC compliance could include the following tasks and more: paying taxes and fees, submitting an annual report, holding annual meetings and keeping minutes (not a requirement but may strengthen personal liability protection in the event of a lawsuit), renewing licenses and permits, and maintaining company records at the office (e.g., articles of organization, operating agreement, names, and addresses of members and managers, tax returns, bank statements, and financial records). Not all states’ requirements are the same. Failure to comply with the rules or meet deadlines could bring on fines or other penalties, lawsuits, or even suspension of the business. CorpNet’s free Compliance Portal offers an easy way to keep on top of all compliance to-dos.
Which One is Right for Your Business?
If you’ve reached an informed decision after talking with an attorney, accountant, and other trusted advisors; reaching out to the state, county, and municipal offices; and weighing the pros and cons, CorpNet is here to help you save time and money as you start your business. Contact our filing experts today to handle filing your business registration forms and other mission-critical paperwork.