Single-Member vs. Multi-Member LLC: Understanding the Differences

The LLC protects your personal resources against any business debts and lawsuits, such that your own personal assets, such as home or savings, will not usually be sold to settle business loans. Also, LLCs are taxed as pass-throughs, that is, the company itself is not taxed, rather the profits and losses are passed directly to the members who include them on their personal income taxes.

LLCs are flexible in management and structure and are therefore suitable to the small and medium-sized businesses. The owners of LLC are referred to as members and there can be a single member or multiple members of an LLC. This tutorial examines the major distinctions between the two structures.

Ownership Structure

Single-Member LLCs

A sole proprietorship is a business in which the owner is the sole owner of the business entity and owns 100% of the membership interest
The sole member takes all the decisions regarding the distribution of profits and losses and the operation of the business

Multi-Member LLCs

Two or more members are considered to be shareholders
The percentage of ownership is normally provided in the operating agreement that also includes the division of profits, voting rights, and other regulations
Strict ownership allocation is not a requirement, it may describe the capital contribution, the roles of day to day running of the business or any settlement that members may have
LLCs may include fewer than 100 members, but a majority of 100 members may choose to be taxed as S-Corporations, so they are limited to 100 members

An LLC is regarded as an independent legal and financial entity no matter how many individuals are members in the LLC, which grants protection to the owners in liability.

Tax Considerations

LLCs are not strict regarding taxation.

Single-Member LLCs

A sole proprietorship is the default taxation of a single-member LLC. The income is then transferred to the personal tax filing of the member and there are self-employment taxes.

Multi-Member LLCs

Multi-member LLCs are defaulted as partnerships with the income taxed based on the share of ownership. Members declare all their profits and losses on their individual tax filings, on Schedule K-1.

Election to Corporate Tax Status

Single and multi-member LLCs are given the option of being taxed as a C-Corporation or S-Corporation by submitting the relevant forms to the IRS.

C-Corp taxation exposes the business to the corporate income tax (21% as of end of 2022) although the distribution made to members is taxed once again at the individual level (double taxation)
By paying themselves a salary and compensating the rest of the profits as a dividend, S-corporation taxation enables members to avoid self-employment taxes, but it increases accounting and payroll requirements

The decision of the tax structure depends on income, number of members, and the possible self-employment tax savings as compared to the extra cost of administration.

Management Structure

There are two major forms of LLCs:

Member-Managed LLC

The business is operated and the decisions made directly by members
Most appropriate to small LLCs in which all the members are active participants

Manager-Managed LLC

The day-to-day operations are taken care of by a designated manager (or not a member)
Applicable to the larger LLCs that have passive or silent members who do not want to participate in the daily decision-making
In certain states, the members are allowed to act as managers together with non-member managers

When you form an LLC in the state, you are in most cases obliged to state whether it is going to be member-managed or manager-managed.

Protection regarding personal liability

Single-member as well as multi-member LLCs offer personal protection against liability except in a few cases:

Members who individually pledge business loans are liable to the same
The members who commit fraud or unlawful conducts can be personally responsible
Breach of the operating agreement also has a tendency of working against a member by subjecting him to personal liability

The members will ensure that they receive maximum protection of liability provided by the LLC structure by ensuring that proper documentation is done, adhering to corporate formalities and ensuring that business and personal activities do not intermix.

Administration and record keeping

Single-Member LLCs

There are low administrative requirements, and fewer records and less documentation.

Multi-Member LLCs

Demand a more organized management such as recording votes and official resolutions. The operating agreements should be elaborate and outline how the profits would be shared among the members, dispute resolution, member duties and other rules of governance. It is strongly advisable to hire an attorney to either prepare or revise the operating agreement to safeguard the rights of all the members.

Member Disputes and Lawsuits

The operating agreement regulates the ability to sue members to one another:

In case the agreement provides the member to be liable to each other, it can be sued
When such liability is outlawed in the agreement, members will find it hard to sue one another
In the absence of an operating agreement, the state default law occurs, and tends to provide only slight legal assistance except in cases where one of the members has suffered a financial loss that was not experienced by the rest

Note that, in spite of personal protection of the members, an LLC itself may be sued as an independent entity. The LLC can be sued by the members in case they have incurred any financial damage.

Frequently Asked Questions

Admit the new member by amending your operating agreement, update state filings if required, and obtain a new EIN if your tax classification changes to partnership.

Yes, multi-member LLCs default to partnership status and must file IRS Form 1065, issuing each member a Schedule K-1 for their share of profits and losses.

State default rules typically require equal distribution among members unless otherwise specified.

Follow buy-out or withdrawal provisions in the operating agreement. If none exist, state law governs the valuation and payout terms for the departing member's interest.

Yes. File IRS Form 8832 for C-Corp status or Form 2553 for S-Corp status, with the election effective on the date you specify, subject to IRS timing rules.

Most states do not mandate them for LLCs. However, maintaining records of meetings and resolutions strengthens liability protection and demonstrates adherence to corporate formalities.

Conclusion

Decision on whether to form a single-member or multi-member LLC is based on ownership, type of management and taxes.

Single-member LLCs are easy to operate and those suited to individual businessmen. Multi-member LLCs demand more specific agreements and management of the organization but can share ownership, experience and resources.

Whichever the type, LLC provides protection of liability, as well as the possibility to choose taxation, and thus it can be considered as one of the most popular business internationally.