A multi-member LLC (Limited Liability Company) is a popular legal business structure that’s formed by two or more owners, known as members. It combines the limited liability protection of a corporation with the pass-through taxation of a partnership, making it an attractive choice for small businesses, startups, and investment groups. It’s the preferred entity for holding real estate.

Key Characteristics

• Separate Legal Entity:
  A multi-member LLC is a separate entity from its owners. This means the LLC can own property, open bank accounts, enter contracts, and be sued in its own name.
• Limited Liability Protection:
  Members are typically not personally liable for the LLC’s debts or legal obligations. Their liability is generally limited to the amount they invested in the business, unless they personally guarantee a loan or engage in wrongful acts.
• Flexible Management:
  LLCs can be member-managed or manager-managed. In a member-managed LLC, all members participate in day-to-day decisions. In a manager-managed LLC, members appoint one or more managers (who may or may not be members) to run the business.
• Operating Agreement:
  Although not always legally required, an operating agreement is strongly recommended. This document outlines the LLC’s structure, member roles, profit sharing, decision-making, and procedures for resolving disputes or dissolving the LLC. It can also provide for what happens when a member dies, or decides to terminate his or her interest.

Tax Basics

By default, the IRS treats a multi-member LLC as a partnership for tax purposes (under Subchapter K of the Internal Revenue Code):

• The LLC does not pay federal income tax itself.
• Instead, it files Form 1065 (U.S. Return of Partnership Income).
• Each member receives a Schedule K-1 showing their share of profits, losses, and other tax items, which they report on their personal tax returns – form 1040.
• Members may be subject to self-employment tax on their share of income, depending on their role (active versus passive) in the business.

LLCs can also elect to be taxed as a C corporation (Form 8832) or S corporation (Form 2553), depending on their tax planning goals. It’s very common for an entity to start as an LLC taxed as a partnership and later elect to be an LLC taxed as an S corporation as circumstances change.

As it applies to start-ups, an LLC has advantages over an S corporation. An LLC member is able to deduct losses to the extent of basis which includes capital contributions and allocable share of partnership liabilities.  S corporation shareholders do not get basis from corporate-level debt, even if personally guaranteed.

When It’s a Good Fit

A multi-member LLC is ideal for:

• Two or more people starting a business together
• Family-owned businesses or real estate partnerships
• Investors who want liability protection without corporate formalities

Final Thoughts

A multi-member LLC offers a balanced combination of liability protection, tax flexibility, and ease of administration. However, success starts with a clear operating agreement, sound financial practices, and ongoing compliance with federal and state requirements. If you’re forming or running a multi-member LLC, consulting with a CPA or attorney is a wise step to ensure the business is structured and maintained correctly.