What is a Multi-Member LLC?

The variety of business entity types that exist in the U.S. allows anyone who wants to create his own business to find the most convenient option. 

There is no universal answer to the question: “Which business entity is better?”

All types of businesses have their strong and weak points. Some of them provide long-term stability and protection, while others allow you to make a profit immediately, without wasting time on registration. 

An LLC offers legal protection of personal assets and tax flexibility for a company with multiple owners, therefore many entrepreneurs choose this structure.

However, even if you plan on starting an LLC, first you should decide whether it will be a multi-member LLC or a single-member LLC. 

In this article we will discuss all the pros and cons, answer the question of how to form a multi-member LLC, and in which case it is more beneficial. 

Furthermore, in this article you will find a list of leading online LLC services that can take care of legal paperwork to make opening of your MMLLC simple and fast.

What Is a Multi-Member LLC?

Friends, family members or spouses can form a multi-member limited liability company to do business together. According to the name of the MMLLC, it is a structure for a business, uniting two or more members/owners, but, at the same time, it is a separate legal entity.

Due to the beneficial features of the MMLLC structure, it becomes more and more attractive to aspiring entrepreneurs every year. Very often multi-member LLCs start as a general partnership. But over time, realizing all the advantages, they are transformed into an LLC. 

Unlike corporations, an LLC is a more flexible and less formalized business structure. 

After you have established an MMLLC, its activities are performed on behalf of the company and it is responsible for its obligations independently.

An important condition of a multi-member LLC is the division of members’ personal assets and assets of the company by means of a “corporate veil”. This prevents creditors from claiming personal assets of the owners – real estate, personal bank accounts, cars, etc. This is true even if the assets of the LLC are not enough to satisfy all the claims.

Of course, the general guidelines are universal for all American LLCs. But the nuances may vary from state to state. Therefore, to learn about the specifics of an MMLLC formation and ongoing compliance, you should check out the information in advance on official state websites or consult with a lawyer.

Why Should I Form a Multi-Member LLC?

Each business has its own peculiarities, so it is impossible to state that a multi-member LLC is a more attractive business type than other businesses or a single-member LLC. Choosing the best type of business should cover such aspects as:

• Specifics of creation and registration;
• An opportunity to protect personal assets;
• Tax treatment;
• Management options, etc.

In other words, to determine whether an MMLLC is right for you, it is important to consider the legal, tax and operational implications of such a decision. If you are in doubt, you should consult with an experienced lawyer or accountant about the advantages and disadvantages of different formal business entities.

So, when is forming an MMLLC really beneficial? Let’s look at the benefit of the multi-member LLC in comparison to other business entities.

1. Legitimacy: unlike general partnerships, an MMLLC is a separate legal entity, so the personal property of the owners is immune. In the event of a lawsuit, creditors can claim only the assets of the company. The status of state-registered business entity also protects your reputation in the eyes of banks, potential partners and investors or courts;
2. Freedom to choose tax treatment: SMLLCs are taxed as sole proprietorship and MMLLCs taxed as partnerships, unless the incorporation documents state otherwise. This system allows you to avoid the double taxation model and manage your finances efficiently. You pay taxes on your business income, indicating all income and losses of the company in your personal tax return. You do not need to file an additional corporate return. However, company owners must also pay self-employment tax on their share of profits.

The owners have the right to choose to be taxed as:

• C-corporation: if you choose this option, the LLC is required to file its own tax return. Moreover, the income of the company is taxed twice when it is distributed among the participants;
• S-corporation: in this case MMLLCs are taxed as partnerships, i.e. the duty to file a tax return falls on the owners. The difference, however, is that the owners need only pay self-employment tax on their salaries and wages, not on their profit distributions.

3. Exclusive rights to a company name: after an MMLLC’s name is registered, other companies have no rights to use it for themselves. At the same time, business name partnerships are not exclusive and do not receive any protection from the state;
4. Flexible business structure: as a rule, in most states MMLLCs are managed by owners. Their responsibilities include:

• To run the day-to-day business operations of the company;
• To make important decisions;
• To enter into contracts, etc.

The owners may delegate part of the everyday tasks of an LLC to one or more professional managers. For this purpose, the rights and responsibilities of the managers should be spelled out in the Operating Agreement.

Thus, the advantages of an MMLLC look quite attractive. However, there are also some disadvantages.

1. Cost and time needed: to start working, an MMLLC must be registered with the state and pay a mandatory fee. In comparison, establishing partnerships does not involve such formalities. Also, their service costs are a bit lower and the number of requirements is less. In particular, partnerships do not have to have a registered agent;
2. Being responsible for the actions of other company owners: MMLLC’s members may be held accountable if any of them commits such actions as:

• A fraud concerning a company’s obtaining a bank loan or misrepresenting information about the nature and purpose of a business’s creation;
• Violation of tax laws, as well as profit and losses distribution rules;
• Causing physical or moral damage;
• Missing the deadline for filing an annual report, etc.

How Do I Form a Multi-Member LLC?

The process of forming a multi-member LLC involves several steps:

1. Checking for name availability: before you write the desired name in the Articles of Organization document, make sure that it is free. To do this, you can use tools like:

• Search by name on the Internet;
• By checking your state’s Secretary of State database.

2. Filing Articles of Organization: depending on the state, this document may be called a Certificate of Organization or Certificate of Formation. The information that it usually contains is as follows:

• Legal name of your company;
• Name(s) of your MMLLC’s owner/member(s);
• Name of your MMLLC organizer;
• Name and address of your registered agent;
• Physical address of your MMLLC;
• Identity of your MMLLC manager (if applicable).

You can find the necessary form on the state’s business forms page and download it to your computer for free. 

The specifics of filing Articles of Organization are also determined by state law. You can choose from filing by mail, in person, and online, but there are some exceptions. Some states prefer electronic filing, while others use the mail. 

3. Operating agreement: most states do not require a written Operating Agreement, but this document is important for the stable operation of an LLC. It outlines key points such as:

• Management structure of the company;
• Rights and responsibilities of the participants;
• Basic principles and procedures, etc.

4. License obtainment: depending on the location and field of business activities, a company may be required to obtain a license before it can operate. To find out if your business falls under these requirements, you can:

• Hire a professional organization;
• Contact:

• Your Secretary of State office;
• County;
• Municipality.

5. Getting EIN: is a unique nine-digit code that the IRS uses to identify your business on the records. An EIN is required for:

• Hiring employees;
• Bank account;
• Obtaining licenses and permits;
• Tax payments.

6. Bank account opening: separating company funds from the personal assets of its owners is the most important condition for maintaining an LLC’s status. This ensures the inviolability of the private property of the business owners in case of any lawsuits against the company;

7. Current requirements: after your MMLLC has officially launched, it must be in compliance with state requirements. The most common of these are the following:

• Filing annual reports;
• License renewal;
• Tax payments, etc.

Violation of these rules can cause fines, lawsuits, and more serious legal consequences, up to administrative dissolution of your LLC.

How Much Does It Cost to Form a Multi-Member LLC?

The filing fees for multi-member LLCs are determined by state law. Thus, depending on the formation state, the company set-up costs can vary from $50 to several hundred dollars.

To clarify the issue of LLC formation costs by state, you can use the LLC formation guide. There is also detailed information about ongoing compliance fees and other peculiarities of doing business in each state.

Can I Hire Someone to Form My Multi-Member LLC?

Depending on your preferences and budget, there are two different ways of forming your multi-member LLC:

1. On your own, using the DIY tutorial;
2. Hire a specialist, a business lawyer or an online company.

Although starting a business on your own can save you some money, an LLC formation assistance of a lawyer has significant advantages. For example, an experienced attorney can take care of preparing and filing your company’s paperwork. 

However, attorneys’ fees aren’t cheap, and most startups have limited budgets. That is why most entrepreneurs prefer professional online services. Cooperating with such a company allows you to get a high-quality LLC creation service at a reasonable price and even small businesses can afford.

We have prepared a list of the top 3 online incorporation services providing business support.

ZenBusiness – Best Overall Value

Only for $39 + mandatory fee they will not only register your LLC, but also provide 1 year of registered agent services absolutely free.

IncFile – Cheapest LLC Service

A basic LLC formation package from this company will cost $0 + state fee. The package includes everything you need to start a business, including a free registered agent for 1 year.

Northwest – Premium Support

The cost of creating an LLC with a Northwest Registered Agent is $225 + mandatory fee. It’ s more expensive than the first two options, but for that money you will get unique benefits such as:

• Customer Support, which is considered the best in this field;
• A free year of Registered Agent services;
• Local scanning of every document they receive on your behalf.

Conclusion

Like any business, at the initial stage an MMLLC needs small investment to form and operate, but these costs are worth it. Of course, creating a sole proprietorship or general partnership is easier, but among multi-member LLC’s benefits are such significant advantages as:

• Tax flexibility;
• Business legitimacy;
• Exclusive rights to the name;
• Business owner’s personal assets protection (real estate, cars, bank accounts, etc.).

To summarize, an MMLLC offers really good conditions for doing business. At the same time, the formation process is not particularly difficult and even an aspiring entrepreneur can do it. However, the final decision on whether or not to create an MMLLC is up to you and your business needs.