What is a multi-member LLC? Definition, pros and cons – Forbes Advisor
How do multi-member LLCs work?
In a multi-member LLC, the owners, known as members, have limited liability for the company’s debts and obligations. This means that their personal assets are generally protected from bankruptcy or lawsuits.
Once the business structure is created, the multi-member LLC must register with the state and obtain a tax identification number. In addition, an LLC may need to obtain licenses and permits specific to its industry or location. LLC members are also considered self-employed and must also pay self-employment tax.
In a multi-member LLC, each member has a stake in the company, contributing to its operations, decision-making and profits. Members have the power to determine the company’s structure and appoint who will manage its operations.
Some MMLLCs choose to elect one or more members or even a third party to handle day-to-day management, resulting in a director-managed MMLLC.
Conversely, if the members of the LLC collectively participate in the management of the company with equal decision-making power, it is referred to as a member-managed MMLLC.
How are multi-member LLCs taxed?
A multi-member LLC, which consists of two or more members, is usually taxed as a partnership by default. This means that the LLC itself does not pay taxes on its income. Instead, the LLC’s profits and losses are passed along to the individual members (owners), who report their share of the income or losses on their personal tax returns. Generally, taxation of multi-member LLCs involves filing forms at the partnership level and individual forms for each member.
An LLC must file Form 1065, U.S. Return of Partnership Income, to report the general financial activity of the partnership. However, if a multi-member LLC elects to be treated as a corporation or S corporation for tax purposes, it must file Form 8832.
Additionally, an LLC may be responsible for employment taxes, which may include Social Security and Medicare taxes and income tax withholding as well as excise taxes. These taxes are typically paid by the LLC on behalf of its employees or members.
Individual members must report their share of the LLC’s income and pay income tax on it. They may also need to pay self-employment tax and estimated taxes. If members have international tax liabilities, they must also submit additional forms.