Single-Member LLC vs. Multi-Member LLC

A single-member LLC vs. a multi-member LLC — is one better than the other? How are they different? What are the pros and cons? Let’s discuss the essentials you should know about single-member and multi-member LLCs.

What is an SMLLC?

An SMLLC, or single-member limited liability company, is an LLC that has just one member. “Member” is another name for “owner” of an LLC. The LLC’s sole owner makes all the decisions and, in turn, makes all of the profits for the business.

On the surface, an SMLLC looks a lot like a sole proprietorship because it’s a one-person business. But many entrepreneurs choose the LLC over the sole proprietorship because LLCs offer personal liability protection (they’re a separate legal entity from their owner). Similarly, an independent contractor might transition into being an LLC for the extra legitimacy and protection of a separate entity.

What is a multi-member LLC?

A multi-member limited liability company (sometimes written MMLLC) is an LLC that has at least 2 members. As joint business owners, the members share responsibilities and profits from their business activities. Often, these LLC’s members are friends or family members who want to start a business together with limited liability protection.

To operate efficiently, most multi-member LLCs adhere to an operating agreement. This internal legal document acts like a charter or constitution for the LLC; it describes how the business will function. Typically, an operating agreement details each member’s responsibilities, what assets members will invest in the business, how the LLC will be managed, and how much profit each member will get. It also addresses how to add or subtract members later on.

Single-Member LLC vs. Multi-Member LLC Taxation

By default, a single-member LLC is a “disregarded entity” for federal income tax purposes. Instead of filing a separate tax return for the business itself, the LLC’s single member reports the business income on their federal tax return. Multi-member LLCs, however, are taxed as partnerships by default. They’ll file an informational report (Form 1065) with the IRS, and each member reports that income on their K-1 Forms within their personal income tax returns and pays accordingly. These are both types of pass-through taxation.

Both single-member companies and multiple-member companies can elect different tax statuses, such as a C corporation or S corporation. These choices require a corporate tax return instead. Since these taxes are complicated, it’s a good idea to consult a CPA or tax attorney for assistance.

What are the differences between single-member and multi-member LLCs?

For the most part, single-member LLCs and multi-member LLCs are very similar. Both offer personal asset protection and a flexible management structure. Both have pretty easy maintenance requirements, too. But these entity types also have a few important differences.

Tax-Time Responsibilities

We’ve already briefly mentioned the taxation structure you’ll follow for a single or multi-member LLC. While those differences are relatively simple, they create several variations in the duties that these business types have when it’s time to file a personal tax return.

Obtaining an EIN

An EIN, or Employer Identification Number, is a 9-digit code assigned to a business by the IRS. It acts like a Social Security number for a business entity. Obtaining one is free — and for multiple-member LLCs, it’s required. Single-member limited liability companies can sometimes avoid obtaining an EIN, provided they don’t have employees (and they don’t need one for a business bank account).

Filing Federal Income Tax Returns

A single-member LLC doesn’t have to file an income tax return for the LLC itself; instead, the LLC’s member reports the business income on their personal return. They’ll also pay self-employment taxes and, if they have employees, payroll taxes. How a single-member LLC files for state taxes will vary by state.

Multi-member LLCs are required to submit a tax return for the LLC itself (Form 1065, U.S. Return of Partnership Income). This return is an informational return only; it describes how much of the LLC’s profits was distributed to each member. Each member also reports their share on their own personal return and pays taxes accordingly.

Decision Making

One of the perks of an LLC is that management doesn’t have to consult a board of directors or a group of shareholders before making a big decision. The LLC’s members get to make the call. If there are multiple members, then the members usually have to agree on all major decisions, unless the operating agreement says otherwise. The operating agreement can have a big impact on what decisions members can make independently or as a team.

In contrast, a SMLLC’s owner gets to operate independently, all the time. That freedom can be nice, but it does come at a disadvantage: the owner can’t bounce ideas off a team member or collaborate to come up with new ideas.

Capital Investments

When an LLC gets started, the members all have the opportunity to contribute capital to the business. Those contributions might include property, equipment, money, and more. Understandably, an SMLLC’s owner will probably start out with less initial capital because only one person will be contributing.

Meanwhile, the members of a multiple-member company can all contribute capital to the business. The operating agreement should provide for each member’s contributions and what happens to their investments over the long-term.

Benefits of a Single-Member LLC

Here are some of the biggest perks to running a single-member LLC:

• Personal asset protection
• Flexible business structure with easy maintenance
• Autonomy for all business decisions

Benefits of a Multi-Member LLC

Running a multiple-member LLC has its perks, too:

• Personal asset protection
• Flexible business structure with easy maintenance
• Multiple members share the responsibilities
• Multiple sources of capital contributions 

What if a married couple forms an LLC?

In most states, a married couple that goes into business together will be a multi-member LLC — even if they’ve decided to completely combine their other finances.

However, a few states follow what’s commonly called “community property law.” In a community property state, most of what a married couple acquires during their marriage is owned by both partners equally. As a result, married couples in these states can form an LLC together and be a single-member LLC. The IRS also recognizes these LLCs as single-member at the federal level.

Currently, the following states adhere to community property laws: Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington, and Wisconsin.

We can help!

Whether you’re starting an SMLLC and don’t want to go solo on the paperwork or you’d like help creating an operating agreement for your multi-member LLC, we can help. Our services, from registered agent service to worry-free compliance and annual reports, exist so you can breathe easy and focus on your business goals.