Multi-Member LLC

What is a Multi-Member LLC?

A multi-member LLC is a limited liability company that has more than one owner or member. Multi-Member LLCs can be used for businesses with family members, married couples, friends, or simply a business that has multiple owners because of its liability protection. The members will set ownership percentages for each member which are usually determined by how much each owner has contributed.

LLCs provide limited protection to personal assets and adds an additional layer of protection from the actions of their members. Both single-member and multi-member LLCs file Articles of Organization with the state and should consider obtaining an EIN and drafting an LLC Operating Agreement.

Benefits of a Multi-Member LLC:

Multi-member LLCs offer the same liability protection for member assets as any LLC. There are five advantages to a multi-member LLC

There are no limits as to how many members the LLC can have.
Members do not have to be individuals only. They can be individuals, corporations, and/or other LLCs.
The LLC does not pay corporate tax
The business can choose to be taxed as a C-Corp or S-Corp.
Members can be non-U.S. citizens.

It is worth noting that there can be additional benefits of having multiple members in the business. Additional perspectives allow the members the opportunity to discuss, collaborate, and capitalize on each other’s ideas and allow you to grow and expand your business.

Additional members mean responsibilities that come with owning and operating a business are shared. Finally, each member can play to their strengths to help advance the operation.

Disadvantages of a Multi-Member LLC:

There are some items that should be considered when establishing a multi-member LLC. While it is true LLCs do provide you with liability protection, it is limited. Members can make intentional and unintentional mistakes. This could lead to violations of the terms described in the Articles of Organization making members at risk to potential personal liability, also known as “piercing the corporate veil”.

Members can be held liable if they:

Engage in fraudulent behavior, such as lying on a loan application or misrepresenting the business
Knowingly make business deals they can not pay invoices for, recklessly borrow and lose money, or otherwise act recklessly or dishonestly which can cause harm to another person.
Misuse business funds
Fail to follow corporate formalities which include keeping adequate financial records or meeting minutes.

Finally, multi-member LLCs require more paperwork when filing business taxes, and members must pay self-employment tax on their share of the profits.

Can I Take a Salary Out of a Multi-Member LLC?

There are a few items to consider when determining how to get paid from your LLC. The short answer is yes, you can take a salary or get paid from a multi-member LLC. This can be done through the owner’s draw or reasonable compensation.

One of the benefits of an LLC is that it is considered a “pass-through” entity which means the business entity does not pay taxes, but instead they are passed through to your personal income.

The exception to this rule is if the LLC elects to be taxes as a corporation. The business would then pay taxes directly to the IRS which means members can be employees and take salaries.

It is always recommended that you speak to a tax professional to discuss the options members have to get paid or receive salaries.

What is the Draw Method?

Members can also be paid by the owner’s draw method which means each member can draw the number of shares in line with their operating agreement requirements while keeping enough funds for the day-to-day business operations and expenses.

What is the Reasonable Compensation Method?

Another method in which owners can draw a salary is by using the Reasonable Compensation method. Reasonable compensation can be used to determine a salary if the LLC is treated as a C-Corp or an S-Corp. It is different from the above as they are not allowed to take the owner’s draw. In this case, members will be considered employees and will have to pay themselves a set salary on the business’s payroll with taxes withheld.

Tax Requirements of a Multi-Member LLC:

They are viewed as a pass-through entity which means the profits and losses flow from the business to each member's tax return. This means members will pay taxes on their part of the profits and losses. There are various forms you will need to file for a multi-member LLC which you should consider when deciding which entity to start up.

Each member will file:

Form 1040 : All taxpayers must file this form
Schedule E : Members will report their share of profits and losses on their personal tax returns
Schedule SE : This is for filing and paying your self-employment taxes. The owner of a disregarded entity must pay Medicare and Social Security taxes.

Each business will file:

Form 1065 : This is an informational return for business to report their income, gains, losses, deductions, credits, etc.
Schedule K-1 : This report is to detail the individual partner’s income, deductions, credits, etc.

The Partnership Return 1065 is the IRS Form that reflects all of the profit and losses that the LLC had in that tax year. This document also reflects the information of the entity (LLC) and lists the Members and their percentages of ownership. This document is linked to an additional K-1 that each member of the LLC will receive.

The K-1 Form is the IRS form that each individual member of the LLC receives from the LLC. The K-1 Form contains the amount of distributions that the member withdrew from the LLC that tax year. Any profits and losses based on their percentage of ownership from the LLC are also listed on this document. Each Member must provide this to their CPA or Tax professional when filing for their income tax returns.