A limited liability company is a legal business structure under state laws.
If you are alone, you can start a single-member LLC, but you require a multi-member LLC if you have other members or partners in the business. Each option has its advantages and disadvantages.
Although the difference between the two options seems obvious (one has a single owner and the other has multiple owners), there are other considerations you need to look into before you can choose one. Your choice of entity affects many aspects of how you start and run a business.
Some of the factors you can consider while deciding the best option include income tax treatment, personal asset protection, management, formation, etc. In addition, to choose the best possible option when forming an LLC, you may want to turn to a LLC formation service (see here) and use registered agents for legal help. To your convenience, we've also put out a great number of dedicated reviews of some of the best such services like Swyft Filings (click here), BizFilings (read more), SunDoc Filings (see article), Inc Authority (see link), or MyCorporation (read the post).
Advantages and Disadvantages of an LLC
An LLC enables you to establish the business as a separate legal entity from yourself. As a result, you are not liable for any business issues, including debts and lawsuits. On the other hand, if your business is a sole proprietorship or a partnership, you are held responsible for business debts, lawsuits, etc.
If you go for a single-member LLC, you get to manage the business on your own. Thus, you don't work to impress other people, but you focus on your business goals and objectives. However, you have to deal with other issues alone, including hiring employees, dealing with customer issues, dealing with vendors, etc.
If you go for multi-member LLCs, you get to enjoy all the benefits of running a business with multiple owners. For instance, you get to share responsibilities with other company members. Additionally, you can brainstorm ideas with other owners to ensure you arrive at the best decision for the business. However, a multi-member LLC requires you to compromise to enjoy a healthy working relationship with other owners. For instance, you have to shelf your personal goals if they don't match those of other company owners, though you should learn how to remove a member from an LLC in case it comes to that.
Considerations When Choosing Between a Single Member LLC and Multi-Member LLC
As mentioned earlier, your choice of entity will affect various aspects of how you begin and run the business. Before you can decide which is best, you can ask for advice from a tax advisor, an attorney, or an accountant.
So, what do you consider to decide which option is best for you?
As the owner of a single-member LLC, you are also considered as the manager.
For owners of a multi-member LLC, they have to decide if it will be member-managed or manager-managed.
Manager-managed LLC: the owners of the multi-member LLC choose a manager who can be one member, multiple members, or a third party. The manager has the authority over the day-to-day operations of the company and other decisions. Members who are not managers can act as passive owners with just a financial investment in the business. Alternatively, they can be involved in making higher-level strategic decisions.
Member-managed LLC: in a member-managed LLC, all the company members take part in the management of the business. The company will require the approval of all its members to make critical decisions such as securing loans, entering into contracts, and other decisions.
The state will consider your LLC to be member-managed unless you specify otherwise.
Regardless of whether an LLC is single-member or multi-member managed, it's vital to have an operating agreement.
The agreement is not a legal requirement when filing your articles of organization for the formation of an LLC in many states. However, it comes in handy in preventing conflicts in the company. It outlines how the business should be operated, the responsibilities and rights of each member, and the decision-making authority.
The operating agreement also outlines what should happen if a member leaves the company (or dies), disagreements among members, and dissolving of the company.
Income Tax Treatment
The business entity will also determine your income tax treatment.
If you go for a single-member LLC, your business will be treated as a sole proprietor for federal tax purposes. On the other hand, a multi-member LLC is treated as a partnership.
Additionally, both the profits and losses are passed down to the owners of the two business entities.
Single-member LLC default tax treatment: the owner of the LLC reports the profits and the losses made by the business on Schedule C of IRS form 1040. The business doesn't report or pay taxes independently.
The owner should also pay self-employment taxes (social security and medicare) on all the business's taxable income. You'll also pay income taxes via quarterly estimated tax payments.
Before deciding the best option between single-member vs. multi-member LLC, you should consider the ownership factor.
Many states in the United States allow various entities to form an LLC, including:
A corporation or another LLC
A single-member LLC has one owner who enjoys complete control of the company. Additionally, the LLC is a separate entity from the owner.
A multi-member LLC has two or more members who share control of the enterprise. The LLC is its own entity separate from the owners. There is no limit as to how many members a multi-member LLC can have. However, it will have only 100 members or fewer if it elects for S Corporation tax treatment.
A multi-member LLC will also decide the percentage of how to share profits and losses among its members.
The number of members in an LLC may not present the ideal situation.
For instance, an owner of a single-member LLC may consider it more beneficial to have a multi-member LLC. They may want to add a partner or a spouse as a member of the LLC. On the other hand, members of a multi-member LLC may wish to form one or more single-member LLCs.
Personal Asset Protection
The limited liability of the company means the owners are protected from business problems.
Both business entities protect their owners' personal property. Since the LLC is a separate entity from its members, the member's properties are protected from liabilities related to business issues. If someone sues the LLC or the business is in debt, the owners cannot lose their personal assets.
Personal assets include bank accounts, a home, retirement savings, etc.
Note, the members can be held liable in some situations. For instance, the owner's personal properties and finances can be at risk if:
A member or manager has not managed the limited liability company according to the operating agreement.
A member has committed illegal activities or other forms of fraud
A member has done something that can compromise the separation between the business and personal transactions. Such activities can include guaranteeing a business loan or co-signing
Whether you are forming a single-member LLC or a multi-member LLC, the steps of formation are similar. These include:
Choosing a business name. Ensure your desired name is available in the state you wish to form your LLC
Select a registered agent. An LLC must appoint a registered agent to act on its behalf. The agent acts as a link between the company and the state. The agent can be a member of the company or a third party. They receive essential paperwork on behalf of the company, including lawsuits and tax forms. The registered agent should fulfill various requirements, including having a physical address in the respective state.
File articles of organization. Articles of organization are the legal documents that establish your company as a legal entity. The information required and the filing fee vary from one state to another. Most states won't ask for an operating agreement while filing the articles of organization.
Apply an EIN. Your LLC will require an EIN whether or not you intend to hire employees or not.
Open a business bank account. Opening an account for the LLC is a vital step in separating your finances and that of the company.
Obtain necessary business licenses. Besides filing the articles of organization, your company may require other business licenses and permits depending on the type of business and its location.
Both single-member and multi-member LLCs have various business tasks that they should comply with to maintain their liability. Single-member LLCs have fewer requirements, including submitting annual reports, paying taxes and fees, renewing permits, etc.
Which one is right for you between a single-member and multi-member LLC? Your choice between the two depends on the considerations stated above. Both business entities limit the owner's liability against various business problems.