The difference between a single-member LLC vs. a multi-member LLC might sound simple, but it's a little more nuanced than you might think.
Find out what sets the two types of LLC apart, the pros and cons of each and how they're taxed to figure out which one is best for you.
What Is a Single-Member LLC?
Simply put, a single-member LLC is a limited liability company (LLC) with just one owner.
You might think that sounds an awful lot like a sole proprietorship, but there's one major difference in how each is started: To set up a sole proprietorship, you don't need to file any special paperwork. But to set up an LLC, you'll need to file Articles of Organization with your state's government.
That extra paperwork might seem like a hassle, but it also comes with the added benefit of more legal protection. Namely, if your LLC encounters legal trouble, then your personal assets won't be at risk.
What Is a Multi-Member LLC?
While a single-member LLC is an LLC with just one owner, a multi-member LLC is an LLC with two or more owners. Each owner holds a specified percentage of the company, which is typically determined by their financial contribution. If you contribute 65 percent of the LLC's startup costs, for example, then you'll likely own 65 percent of the company. This information should be spelled out in your LLC's operating agreement.
Note that in order for your LLC to be certified as a certain type of business, a specific percentage of it must be owned by a specific type of person. If you want your LLC to be certified as being a women-owned business, for example, it must be at least 51 percent owned and controlled by women. So, you may want to keep that in mind when determining each member's ownership percentage.
And just as a single-member LLC is different than a sole proprietorship, a multi-member LLC is also different from a partnership. That's because a multi-member LLC requires formal filing to establish, while a partnership doesn't.
Also, like a single-member LLC, a multi-member LLC offers liability protections that a partnership can't.
Single-Member LLC vs. Multiple-Member LLC: Pros and Cons
If you want to determine whether a single-member LLC vs. multi-member LLC is right for you, you'll need to compare the advantages and disadvantages of each one.
If you start a single-member LLC with yourself as the owner, you'll enjoy benefits like:
- Control over the business's operations
- The independence to work with whatever suppliers, agencies and business partners you'd like
- Simplified decision-making protocols
However, you'll also encounter cons such as:
- A greater financial burden
- Less assistance with administrative tasks
That being said, what are the benefits of multi-member LLCs? They come with advantages along the lines of:
- An even distribution of responsibilities
- More efficient brainstorming sessions
- Help hiring and managing employees
By contrast, the downsides of multi-member LLCs include:
- Compromising in order to reach agreements
- More complex decision-making processes
- The risk of other members committing fraud, embezzling or otherwise landing the LLC in legal and financial hot water
How Is a Single-Member LLC Taxed?
According to the IRS, "an LLC with only one member is treated as an entity disregarded as separate from its owner." The only exception is if "it files Form 8832 and affirmatively elects to be treated as a corporation."
In simple terms, that means the IRS won't view your income as being separate from your company's. Instead, you'll pay tax on your company's earnings in the same way you would your own personal income.
You can do so using Form 1040, the form used by all U.S. taxpayers to file their personal income returns. Usually, that means filling out Schedule C, Schedule E or Schedule F of Form 1040, depending on which option is most relevant to your LLC.
Wondering if a single-member LLC can have multiple owners? The only instance in which that's possible is when both members are a married couple: In that scenario, they can file their income tax return together (or jointly, in IRS terms).
How Is a Multi-Member LLC Taxed?
For federal tax purposes, a multi-member LLC is taxed in the same way as a partnership. A partnership, in turn, is taxed as part of each partner's personal income tax.
As the IRS puts it, "a partnership must file an annual information return to report the income, deductions, gains, losses, etc., from its operations, but it does not pay income tax." Instead, "each partner reports their share of the partnership's income or loss on their personal tax return."
As such, each member needs to fill out Schedule K-1 of Form 1065 to report their share of the LLC's income, losses, credits and the like. Then, the business must file Form 1065 using the information from the members' respective Schedule K-1 documents.
In the end, neither a single-member or multi-member LLC is objectively better or worse than the other. Instead, it's all about which one best suits you, your needs and your work style.
If you choose based on those factors, you're sure to make a decision that will serve you and your business well for years to come. And when you're ready to make your company a reality, you can file your LLC for $0 + state fees with Incfile.