As a business lawyer working for over a decade, one of the most common questions I get asked is, “What’s the main difference between a single member LLC vs multiple-member LLC”?
One of the most important decisions you will make as a business owner is deciding on the type of legal structure to use for your company.
Deciding for a Corporation over a Sole Proprietorship, for example, can have a long-term impact on how you finance your business, how you report to the IRS, and more.
It’s no exaggeration to say that this is one of those major decisions that can be make-or-break.
While there is no one “right” legal structure for small businesses across the board, a majority of them benefit from the LLC format.
There are several benefits that an LLC structure offers, starting with the flexibility to choose between a single-member and multi-member LLC format.
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Single Member LLC vs. Multi-Member LLC: Everything You Need to Know
Before we get started, it’s a good idea to always consult with a business lawyer here to make the best business decisions.
A business lawyer will be able to help you understand the different business entities, key differences, and the specific laws and regulations in your state and guide you toward the best legal structure for your business.
Also, here are 18 critical questions to ask a lawyer when starting a business.
Now, let’s dive into what exactly is an LLC business structure.
What is an LLC?
First things first: When we talk about an LLC, what exactly are we talking about?
The Limited Liability Company has been around since the 1970s.
Initially, it was intended to provide a legal shield for real estate companies, though now it’s become widely used across virtually every industry or vertical.
The LLC is beloved for a number of reasons, including the fact that it offers its members some personal liability protections.
To understand what makes the LLC format so useful, it’s important to consider the broader context.
When you first start generating income based on self-employment, the government automatically considers you to be a Sole Proprietor.
You are a single person operating your business.
What this means is that there is no distinction between you and your business; the business is not its own entity, not for tax purposes, and not in matters of legal litigation, either.
Difference between LLC and Sole Proprietorship
Sole Proprietorships are so easy from an administrative standpoint.
But they also have severe shortcomings, including the lack of personal liability protections.
For example, if someone brings a lawsuit against your business, they are bringing a de facto suit against you.
As a sole owner of the business, you are assuming all the risk associated with that lawsuit against your business.
By contrast, when you register your business as an LLC, you actually create a whole new legal entity.
What this means is that you can keep your personal savings, retirement accounts, and family nest egg safe and secure, totally off the table to litigators and creditors.
This personal liability protection is just one of several benefits that the LLC format offers to small business owners.
What are the Benefits of an LLC?
Some additional reasons to consider the LLC management structure include:
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Compared with other legal structures, including Corporations, LLCs have very light regulatory burdens.
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With an LLC you can choose between multiple tax options, including both pass-through and corporate taxation.
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Registering an LLC confers professionalism and respectability to your business, which can help establish trust with customers, vendors, and potential partners.
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The LLC format also opens doors for a broader range of financing options, including business loans and lines of credit.
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The personal liability protections allow you to invest in your small business with greater confidence and peace of mind.
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Transferring the ownership of your LLC is quite a bit easier than it would be with a Sole Proprietorship, which can be useful in succession planning.
These are just a few of the benefits that small business owners can anticipate when they register their company as an LLC.
Now you may be wondering what’s the best form of ownership for my business? I explain more here.
How Do You Register Your Business as an LLC?
With respect to how you register your LLC, the process may vary a little bit from state to state.
What follows is a fairly general outline of the process below.
Choose the State Where You Will Register
Legally speaking, you can register your LLC in the state of your choosing.
To simplify your tax reporting (and to minimize administrative costs), it’s almost always best to register in your home state, or the state where you’re generating your business income.
Keep in mind there are tax implications to worry about if you are going to register in a foreign state.
If you need help forming your LLC, book this 1-hour service with me here.
Pick a Name
The name you choose for your LLC has certain legal dimensions.
Specifically, you have to pick a name that isn’t already in use by another LLC in the state where you’re registering.
This is not the same as a trademark search of your name, which is on a federal level.
This is simply a search conducted on a state level to ensure your business name does not present a conflict with existing LLCs.
If you need to check a business name for trademark registration, we offer that service here as well.
Name a Registered Agent
Every LLC is required by law to have a Registered Agent, which can be either an individual or an organization tasked with receiving official documents.
It is typical to outsource this task; you can subscribe to the best LLC services in your state for as little as $100 annually.
Or you could be your own registered agent for the LLC.
File Paperwork
There are two primary documents you need to register your LLC: Articles of Organization and an Operating Agreement.
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The former document is filed with your secretary of state and officially creates the LLC entity.
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The LLC Operating agreement is generally not filed with your state but it’s needed for clarifying the relationship between you and any partners you bring on board.
Make sure to use a proper LLC Operating Agreement prepared by a lawyer (this one works for both single and multi-member LLCs).
You also need to know your state laws because there may be additional formation documents needed depending on where you live.
For example, when I help someone file an LLC in California through our 1-hour LLC service, we also make sure to file an additional form with the state called the Statement of Information.
This is a one-page informational document that lists some basic information about your LLC such as the contact info of its owners. If you fail to do so, there will be late fees and penalties.
Each state has different requirements for LLC formation documents, so it’s important to work with a lawyer and understand what is needed in your specific state.
Some states may also require an initial report to be filed in addition to the articles of organization and operating agreement.
Then after forming your LLC, make sure to do these 4 crucial things.
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You need to keep your LLC in good standing and file your annual report with the state as well.
Establish Your Financials
A couple of quick points about getting your finances in order:
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To begin with, you’ll need to claim a (free) EIN from the IRS.
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You’ll also need to establish a business bank account that’s distinct from your personal checking or savings accounts.
Related Post: Legal Requirement of Filing a BOI Report for Your LLC
What are the Differences Between Single Member and Multi-Member LLCs?
Something else you’ll need to do is determine whether you plan on operating as a single member or multi-member LLC.
So let’s go over the key differences between the two:
Ownership
One of the most obvious distinctions here is ownership.
Single-member LLCs are owned by one person. So there’s a single owner of the business.
This structure is ideal for individual entrepreneurs (or “solopreneurs”).
It can also be prudent for a single business entity looking to limit personal liability while maintaining unified control over the company.
A multi-member LLC, on the other hand, is owned by two or more people or entities.
This is the option you want if you’re interested in accommodating the needs of multiple partners or business investors.
Management
Another distinction pertains to how the business is managed.
In a single-member LLC, the business owner usually handles all the day-to-day decision-making.
In a multi-member LLC, LLC members or business partners can agree on a model for distributing duties and responsibilities.
They can allocate all authority to just one active member, or they can outsource management duties to an external vendor or provider.
By the way, did you know that this all-in-one business tool can run your entire business online? You will be blown away!
Taxes
When deciding between a single-member or a multi-member LLC, the question of taxation looms large.
Typically, a single-member LLC is treated as a “disregarded entity” by the IRS.
This means the LLC’s income and expenses are reported on the owner’s personal tax return, making it possible to avoid double taxation.
The same is basically true for multi-member LLCs, with one wrinkle: Multi-member LLCs must clarify how profits are distributed between members.
For example, one member may take 40 percent of the profits, claiming them on their personal tax returns, while their partner takes the other 60 percent.
Liability Protections
What about the liability protections that LLCs are known for?
Here, there is little distinction to be made.
A single-member LLC offers protections for its owner, while a multi-member LLC spreads those protections to each of its members.
All member assets are secured against potential lawsuits or creditors.
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Profit Distribution
A related question is that of profit distribution.
With a single-member LLC, the owner has complete control over how profits are used or reinvested.
In a multi-member LLC, meanwhile, profits and losses are distributed according to the Operating Agreement.
Legal Requirements
It’s also important to understand the different legal requirements for single member and multi-member LLCs.
For example, make sure your website has these 3 legal pages.
As a rule of thumb, single member LLCs are quite simple to operate.
As a sole member, you don’t have to worry about disputes with other individual members.
By contrast, a multi-member LLC usually calls for a much more complex Operating Agreement.
All business operations need to be run by the members of the LLC to avoid legal issues.
Changing Ownership
A final area for comparison is flexibility in ownership changes.
Adding or changing owners within a single-member LLC tends to be complex and may require restructuring the LLC, if not forming a new one altogether.
By contrast, membership changes within a multi-member LLC are usually governed by the Operating Agreement, which can provide guidelines for such changes.
Again, creating a robust Operating Agreement when you start the company will help ease potential friction down the road.
Key Differences of Single Member LLC vs Multi Member LLC
As you can see, the main difference between a single member LLC vs multi-member LLC lies in ownership and management responsibilities.
In a single member LLC, there is one owner who has full control over the company’s decision-making.
On the other hand, in a multi-member LLC, management responsibilities are shared among all members.
Additionally, there may also be differences in the types of taxes each structure is subject to, as well as the potential for additional capital contributions and investments in a multi-member LLC.
Which Type of LLC is Right for You?
As you consider your options for LLC formation, it’s important to weigh the pros and cons of each type.
If you’re really interested in running the business yourself, handling day-to-day affairs, and maintaining complete control, a single-member format makes sense.
But if you’d like to court investors or distribute managerial functions among various partners, the multi-member approach might be better.
Both options can be effective for streamlining your business taxes, and accounting practices, shielding your personal wealth, and creating legal liability protections.
As you consider registering an LLC, you can always reach out to a business lawyer with specific questions.
A business attorney can also provide insight as you seek to get your LLC up and running.
Need your LLC filed correctly in just 1 hour? (plus free consultation with a lawyer) Sign up for our 1-hour Done-with-you LLC service here.
FAQs on Single Member LLC vs Multi Member LLC
Below are answers to some common questions about limited liability companies.
Can I Make a Website Without an LLC?
I answer this important question in this video.
Is it better to have a multi-member LLC or single-member LLC?
There is no one right answer to this question.
It depends on the specific needs and goals of your business.
However, there are a few factors to consider when deciding between a multi-member LLC or single-member LLC.
In terms of legal structure, both single and multi-member LLCs offer limited liability protection for their owners, meaning that personal assets are protected from any business liabilities.
Advantages
One potential advantage of a single-member LLC is simplicity.
With only one owner, decision-making can be streamlined and there is no need to consult with other members.
This can also make it easier to maintain control of the business and its operations.
On the other hand, a multi-member LLC may offer more opportunities for growth and expansion.
With multiple owners, there is potential for more resources, expertise, and connections to be brought into the business.
Additionally, having diverse perspectives and skill sets among members can lead to more well-rounded decision-making.
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Taxation
Another factor to consider is taxation.
In most cases, both single-member and multi-member LLCs are considered “pass-through” taxation entities.
This means that profits and losses are passed through to the owners’ personal tax returns rather than being taxed at the business level.
However, multi-member LLCs may have more flexibility in how they are taxed, as they can choose to be taxed as a partnership or corporation.
Ultimately, the decision between a multi-member or single-member LLC should be based on your specific business goals and needs.
You should also check out this video to learn how to make your website legal.
It may also be helpful to consult with a lawyer or accountant to determine which option is best for you.
Whichever type of LLC you choose, remember that it’s always important to maintain proper legal and financial documentation to ensure compliance with state laws and regulations.
What are the disadvantages of a multi-member LLC?
One of the main disadvantages is the potential for conflicts among members.
With multiple owners, disagreements may arise regarding business decisions or management styles.
This can lead to tension and potentially even legal disputes.
Additionally, as a multi-member LLC grows in size and complexity, it may become more difficult to make decisions and reach a consensus among all members.
This can slow down the decision-making process and hinder the business’s ability to respond quickly to changes or opportunities in the market.
Single-member LLC owners don’t have to face this problem.
Another disadvantage is that a multi-member LLC may require more administrative tasks.
This can be holding regular meetings and documenting minutes, which a single-member LLC does not have to.
This can add to the overall cost and workload of running the business.
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Are husband and wife considered single members LLC?
In most cases, a husband and wife who own an LLC together would be considered a multi-member LLC.
However, there may be exceptions to this depending on state laws and regulations.
It’s important to consult with a lawyer or accountant for specific guidance in your situation.
How is multi-member LLC taxed?
As mentioned above, multi-member LLCs are typically considered “pass-through” entities for tax purposes.
This means that the profits and losses of the business are passed through to the individual tax returns of each member instead of being taxed at the business level.
However, multi-member LLCs have more flexibility in how they can choose to be taxed.
Final Thoughts on Single Member LLC vs Multi Member LLC
Both single member and multi-member LLCs have their advantages and it ultimately depends on your specific business needs and goals.
Consulting with a business lawyer can help you understand the major differences between these structures.
This way, you can determine which one is best suited for your business.
Remember, making an informed decision about your legal structure can have significant long-term impacts on your company’s success.
So be sure to carefully consider all options before deciding on a single member or multi-member LLC format.
The bottom line: No matter which type of LLC you choose, you will likely enjoy considerable benefits as stated above.
Let me know in the comments which business structure you choose. Or need more help deciding? Book a call with me here.
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