A limited liability company (LLC) is a business structure where the owner isn’t personally responsible for the organization’s debts or losses. This means that if a company runs into financial trouble, the most you’d lose is what you’ve invested. In other words, your personal assets are safe. While many people start with a single-member LLC (one owner), those looking to go into business with partners often choose a multi-member LLC – a limited liability company with two or more owners.
What you’ll learn
What you’ll learn
Updated: February 11, 2025
Key takeaways
- A multi-member LLC is a limited liability company with two or more owners
- LLCs offer flexible tax options and protect owners from personal liability
- LLC owners can choose between corporate tax structures and pass-through taxation to minimize their tax burden
- Limited liability protection makes multi-member LLCs better than general partnerships
Because of its simple setup and personal liability protection, a multi-member LLC can be a business structure that’s a good fit for many organizations. But how do you know if it’s the right fit for your needs?
In this guide, we’ll explain what a multi-member LLC is, how it compares to other setups, and some potential pros and cons to consider when deciding if it’s the right fit.
Key features of a multi-member LLC
A multi-member LLC is a limited liability company with more than one owner. The owners are called “members.” They can be individuals, domestic corporations, foreign entities, or other limited liability companies.
Married couples with family-owned organizations, friends who co-found small firms, and investors who go into business together often form this type of LLC to protect their personal properties.
The main aspects of a multi-member LLC are as follows:
- Limited liability protection: If the business can’t pay its debts, creditors can only take over the company’s assets — not the personal stuff that belongs to the owners, like their houses or cars.
- Flexible management options: The owners choose how their companies are managed. The businesses can be member-managed LLCs, where all owners participate in daily operations, or manager-managed LLCs, where owners pick one person (a member or someone else) to run the business.
Requirements for establishing a multi-member LLC vary by state, but the process usually involves filing a legal document (Articles of Organization) and paying filing fees. Owners vote before closing a multi-member LLC. If the majority wants to shut down the company, they file a separate document (Articles of Dissolution) with the state of formation.
A multi-member LLC is just one type of legal business structure. To get a rundown on some of the other most common ones, we asked Tom Brock, a licensed CPA and CFA charterholder to share which you’re likely to come across (with definitions for each). They are in the table below.
| Common legal business structures | |
Single-member LLC
|
Sole proprietorship
|
General partnership
|
Limited liability partnership
|
C corporation
|
S corporation
|
If you’re considering establishing a multi-member LLC, you may be wondering how one gets paid in this process. Once more, we caught up with Tom Brock for his insights to understand how things work.
How do multi-member LLC owners get paid?
According to Tom, “multi-member LLC owners can get paid via distributions, salaries, or guaranteed payments.”
“Distributions are most common; they occur when a multi-member LLC’s profits are passed through to its members based on the ownership percentages or profit-sharing stipulations outlined in an entity’s operating agreement. The LLC does not pay taxes on these distributions, but members must report them as income and pay self-employment taxes on the amounts received.”
— Thomas J. Brock, CFA, CPA
Salaries
There are other ways to get wages from point a to point b in this business structure. “Salaries are oftentimes paid to LLC members who actively work for the business (when the LLC elects to be taxed as an S corporation),” explains Tom. “These payments are deductible expenses for the LLC, but the entity must withhold and pay its share of payroll taxes on the amounts.” It’s also important to remember that “members must report the salaries as personal income,” he says.
Guaranteed payments
Guaranteed payments are the third form of payment for LLC members. “This arrangement consists of fixed amounts (typically, cash) paid to members in exchange for services provided or capital contributions made, regardless of the LLC’s profitability,” Tom says. “These payments are deductible expenses for the LLC, but taxed as income for the recipients, who must also pay self-employment taxes on the amounts received.”
Multi-member LLC vs. general partnership
Both LLCs and partnerships involve two or more owners. Owners in multi-member LLCs are called “members.” In partnerships, they are called “partners.”
In general partnerships, “all partners are personally liable for the partnership debts,” according to the California Tax Service Center. Owners enjoy liability protection in multi-member LLCs — only the business assets (not personal properties) can be used to pay claimants and creditors.
By default, the IRS taxes multi-member LLCs as partnerships unless they request otherwise.
Single-member LLC vs. multi-member LLC
A single-member LLC is a limited liability company with only one owner. Conversely, a multi-member LLC has two or more owners. Both business structures protect you from personal liability in the event the company faces a lawsuit or bankruptcy.
Taxation of multi-member LLCs
According to the IRS, a local limited liability company with more than one owner is automatically taxed as a partnership. Multi-member LLCs can accept this default classification or file Form 2553 to be taxed as a C corporation (C corp) or S corporation (S corp).
Tax filing requirements
When the IRS treats a multi-member LLC as a partnership, the business reports its income, gains, losses, deductions, and other financial data using Form 1065, US Return on Partnership Income. Every member also completes Schedule K-1 (1065), which shows each owner’s profits, losses, deductions, and more. When LLC members file returns this way, they pay self-employment tax on their share of partnership profits.
If the IRS taxes an LLC as an S corporation, the company files Form 1120-S, US Income Tax Return for an S Corporation. Being treated as an S corporation reduces your tax burden. That’s because each owner only pays taxes on personal income (pass-through taxation) and not on corporate income. This eliminates double taxation.
You can also deduct losses on personal income tax if the IRS treats your LLC as an S corp. Consider consulting with a tax professional to learn other LLC tax benefits and how to meet all the filing requirements.
Sharing profits in a multi-member LLC
A multi-member LLC’s operating agreement outlines how and when owners get compensated. Common ways of paying yourself in a multi-member LLC are as follows:
- Profit distribution among members: Each member may receive a percentage of the entity’s profit based on their ownership stake. For example, if one member owns 30% of the organization, the person receives 30% of the profits.
- Salary: If some or all LLC members are involved in daily business operations, they can earn wages, just like any other employee, on top of their share of the business profits. In this case, robust solutions like OnPay’s payroll software come in handy.
Next, let’s take a closer look at the potential pros and cons of a multi-member LLC with our subject matter expert Tom Brock.
Advantages of a multi-member LLC
Starting an organization is exciting. But figuring out the best business structure for it can be tricky. Here’s why a multi-member LLC might be the good fit for your company.
Makes it easy to raise capital
A solo founder often has to rely entirely on their own resources to start or grow a company, which can be pretty limiting. But with multiple co-owners in an LLC, you have a team to back you up. With pooled resources, it’s much easier to kick things off and scale up quickly when the time is right.
Members can share management responsibilities
Running a successful business on your own can be overwhelming. With a multi-member LLC, you don’t have to do everything alone. Each co-owner can take on different business responsibilities based on his or her strengths and abilities. Splitting the workload among multiple people can reduce stress, mitigate burnout and improve the effectiveness of business operations.
Boosts credibility
Having multiple members or owners signals that more than one person believes in your business. Strength in numbers can reassure potential creditors and investors that the company has a solid foundation and diverse perspective. Ultimately, this can bolster your ability to raise capital and navigate around the challenges that may occasionally arise.
The advantages of a multi-member LLC are clear, but this type of business structure is not without its disadvantages. Below, Tom touches on some of the less-than-positive implications.
What are the disadvantages of a multi-member LLC?
Potential conflict among members
Disagreements are inevitable when multiple people make decisions in a company. Whether it’s clashing over business strategies, money matters, or just plain personality differences, conflicts among LLC members can slow things down. A clear operating agreement, which spells out how decisions are to be made, can reduce disagreements.
Complexity in taxation
Members need to file individual self-employment tax returns. The LLC must also file an informational tax return to report its profits and losses. If the company has employees besides its members, it must collect and pay payroll taxes, such as Medicare and Social Security.
Handling all these tax compliance matters professionally and accurately can be tricky, especially if you’re not a fan of math. If that’s the case, hiring a tax expert can be a great idea.
Ongoing compliance obligations
In addition to the tax compliance requirements above, a U.S. limited liability company usually must file an annual report with its state of formation, disclosing up-to-date details about the organization.Additionally, an LLC must remain compliant with all state laws, including labor and environmental laws.
Is a multi-member LLC right for you?
A multi-member LLC business structure is suitable if one or more of the following circumstances apply:
- You want to co-own a business with your spouse, friend, or colleague.
- You need to protect your personal assets should the organization run into financial troubles or get sued.
- Two or more people want to combine financial resources, skills, and networks to increase the chances of business success.
- You’re ready to share control and management responsibilities in your business.
We’ve covered a lot of ground above. Hopefully, you now have a fairly strong understanding of the multi-member LLC business structure. That said, there is one more idea worth exploring. Once again, we caught up with Tom to get his thoughts on a question that many prospective business owners are contemplating.
Is it better to be a multi-member LLC or a single-member LLC?
Determining whether a single-member LLC or multi-member LLC is best for your business depends on your ownership intentions, access to capital, comfort level with complexity, and tax preferences.
Tom’s take on when a single-member LLC is worth a closer look
“A single-member LLC makes sense for a solo entrepreneur that does not have concerns about his or her ability to finance the business. It’s generally simpler to manage than a multi-member LLC, but offers the same limited liability protections. By default, a single-member LLC is taxed as a sole proprietorship. However, if desired, it can be taxed as a C corporation or S corporation, assuming this makes sense economically and the necessary filings are completed.”
Tom’s take on when a multi-member LLC makes sense
A multi-member LLC makes sense for a business with multiple owners/partners that desire to pool financial resources and managerial expertise. Overseeing this type of structure involves establishing a robust operating agreement and continually and positively managing conflict. This can be very challenging, but the business outcomes achievable via diversity of thought can be powerful.
Keep in mind
Regarding limited liability protections, a multi-member LLC is the same as a single-member LLC. By default, a multi-member LLC is taxed as a partnership. However, if desired, it can be taxed as a C corporation or S corporation, assuming this makes sense economically and the necessary filings are completed. We’ve come to the finish line which means we have one final thoughts from Tom when it comes to choosing a business structure that best suits you needs.
Tom’s take on choosing the right LLC structure
“Ultimately, if you want complete control of your business, have ample capital and value simplicity, you should probably go with a single-member LLC. If you want to pool financial and intellectual resources with other individuals and are comfortable with heightened levels of complexity, you should probably go with a multi-member LLC. That said, consulting with a financial advisor or attorney can help you determine the optimal option.”
— Thomas J. Brock, CFA, CPA
Making the multi-member LLC decision: Do your research
In a multi-member LLC, you’ll likely pay wages to employees and co-owners involved in daily business operations. That means knowing the difference between gross pay vs. net pay and making sure all calculations are accurate. While this structure offers many advantages, from shared responsibilities to increased access to capital, it’s important to weigh the benefits with complexities of multi-member ownership.
To minimize the guesswork involved in making sure everyone is paid properly using this business structure, try an online payroll system like OnPay. Best of luck as you choose the structure that works best for your needs and when it comes to payroll, our team is here to help!
Take a tour to see how easy payroll can be.
Jon Davis is the Sr. Content Marketing Manager at OnPay. He has over 15 years of experience writing for small and growing businesses. Jon lives and works in Atlanta.