If you are thinking about forming an LLC, you might have some questions. Depending on the size of your business, you may wonder if you are eligible as a company that has several owners. The truth is that an LLC can be a business entity with a single owner or multiple owners. If you are going to form a multi-member LLC (MMLLC), there are a few things you need to know.
What is a Multi-Member LLC (MMLLC)?
A multi-member LLC has two or more owners, or members, that control the company. There may be an unlimited number of members in an MMLLC. The exception is when the MMLLC elects to be treated as an S-Corp for taxes, which only permits for 100 or fewer owners.
What are the Benefits and Drawbacks of an MMLLC?
The most significant benefit of forming an MMLLC is that the owners receive liability protection between their personal assets and the business. So, if someone sues the business, only the company’s assets are at stake in most cases. This same protection extends to debt, where an owner would not be personally liable for the debts of the business unless they sign a personal guarantee. Other benefits of an MMLLC include:
- Members can be non-U.S. citizens.
- Members can be individuals, corporations, or other LLCs.
- The company pays no corporate tax.
- The MMLLC can opt to be taxed as a C corp or an S corp.
The biggest downside of MMLLCs is that a member could be held liable for the actions of another member. For example, members can be found responsible if they:
- Commit fraud, such as lying on a loan application or misrepresenting the business;
- Misuse business funds;
- Fail to keep sufficient financial and operating records; or
- Knowingly do something that is illegal or reckless and causes harm.
Some of the other drawbacks of MMLLCs include:
- They require state-specific registration.
- Business taxes can be complex.
- Members are required to pay a self-employment tax on their portion of the profits.
- Owners must change their tax status if they wish to be employees of the business.
How is an MMLLC Taxed?
MMLLCs are taxed similarly to general partnerships, but they have the option to choose to be taxed as either an S corp or a C corp. This can be done by request by filing a Form 8832 with the IRS.
The company itself doesn’t pay taxes, meaning it is a pass-through entity. Instead, income flows from the LLC to each member’s personal tax return. This happens whether or not members receive any payout from the business, and the allocation depends on the percentage of ownership.
How is an Owner Paid With an MMLLC?
If you are member, or owner, of an MMLLC and wish to pay yourself, you can take a distribution of your portion of the profits. How, when, and to whom profits will be distributed should be spelled out in your LLC operating agreement.
If you have elected to be treated as an S corp or C corp for tax purposes, both entities are required to pay owner-employees “reasonable compensation.” With regards to an MMLLC, an owner-employee is a member that is involved in the daily operations of the business and is paid wages through a payroll system instead of distribution. Since there is no standard guideline for “reasonable compensation,” this is an issue you should discuss with your accountant.
Noland Accounting Center delivers personalized accounting, consulting, and tax planning services to small businesses throughout Southeast Wisconsin. Our accountants and CPAs can help your business with accounting, bookkeeping, payroll, tax preparation, and other services. Contact us today to learn more.