Registering Your Small Business: Single-Member LLC vs. Multi-Member LLC

Setting up a limited liability company (LLC) is the 1st step in ensuring that your business is squared away with your state. But it’s common for business owners to look at single-member LLCs (SMLLC) and multi-member LLCs (MMLLC) and shake their heads.

Besides adding more people, is there really a difference?

While both types of businesses are limited liability companies and essentially offer the same overall business structure, there are a few areas where the 2 differ. Taxes, in particular, have different requirements.

In this article, we’ll compare and contrast these 2 business structure types, so you can better decide which is right for you.

What’s the difference between a single-member LLC and a multi-member LLC?

On the surface, the difference often appears superficial. Single-member LLCs have 1 owner, and multi-members have 2 or more, right? But in reality, there are various differences that every business owner should be aware of:

• Ownership — With a single-member LLC, only 1 person is required to make and implement decisions. But as you add more people into the mix, you’ll need to get all members to agree to changes.
• Taxes — An SMLLC generally is treated as a sole proprietorship, while an MMLLC is viewed as a partnership.
• Liabilities — Personal liability may differ in some specific situations, such as a husband-wife MMLLC. However, LLCs generally have more protection against bankruptcy.

Furthermore, when you have an MMLLC, members will need to determine how they each will be involved in the company.

When you have an MMLLC, members will need to determine how they each will be involved in the company.

For example, Member A may focus on day-to-day operations, while member B will contribute capital and act as a business advisor.

Is a single-member LLC the same as a sole proprietorship?

While the 2 structures are similar, a single-member LLC is different than a sole proprietorship. Both structures ensure that there is 1 owner and that taxes are filed under the owner’s income statement.

However, the company and the individual are the same with a sole proprietorship,. With an LLC, these are 2 separate entities. This is the primary reason most business owners choose to register as an LLC.

The separation between the individual and the company translates into more legal production. If someone attempts to sue your business and you’ve filed as an LLC, they usually can’t come after your personal assets. But as a sole proprietor, you could potentially lose your personal property.

Who controls a multi-member LLC?

When it comes to ownership, this depends on the percentage of ownership you and your members decide on when the company is registered. However, this percentage may not affect how the company actually runs.

For example, consider a 3-member LLC. In this situation, two members may split the workload for managing regular operations, while the 3rd member may be an investor or part-time counsel.

How do you pay yourself in a single-member LLC?

If you’re wondering how to pay yourself in an LLC, with a single-member LLC, the process is pretty straightforward. Through owner’s draw, you can simply take out your regular paycheck from the company.

For a multi-member LLC, each member would use an owner’s draw. In some cases, they can also use guaranteed payments to set up salaries.

After choosing your business structure and setting up your business, you’ll want to set up a business bank account, and either use direct deposit or a payroll platform to automate this process.

Should a married couple be a multi-member LLC?

Couples who own a business commonly choose to create a partnership through an MMLLC. But many couples don’t realize the tax implications of filing as a partnership.

For example, the filing date for taxes is usually March 15th, not April 15th. Penalties for partnerships may be harsher than with SMLLCs.

And if you decide to move ahead registering with an MMLLC, it’s important to also consider which percentage each member will have. It’s common for the wife to own 51% of the business, to leverage woman-owned or minority-owned status.

Tax considerations: Single-member LLC vs. multi-member LLC

Single-member LLCs are typically taxed based on their income with the owner’s tax return. That said, they can choose to file as a corporation using Form 2553.

And while each member in an MMLLC will experience taxation at the income level, there are a few more steps involved in this structure. An MMLLC will be required to file a tax return, and members may have to file a K-1.

In either case, you’ll also need to consider state and local tax laws. As a result, it’s often simpler to remain an SMLLC, but there are times when becoming an MMLLC is unavoidable.

Bankruptcy protection

With a single-member LLC, you can technically separate personal and company assets. However, a judge could consider personal and company assets the same if there is an overlap.

For example, perhaps you use a company car rather than buying a personal one. If you need to file for bankruptcy, the court could view the car as a company asset and seize it.

The situation can get more complicated with a multi-member LLC. When you have multiple stakeholders, the court requires consent from all members to seize company assets.

Should you file as a single or multiple-member LLC?

Ultimately, whether or not you should file as a single or multi-member LLC hinges on your goals for your company. Some questions to ask yourself are:

• Are there other stakeholders who are instrumental to the company’s success?
• How will other owners contribute to the company?
• If you are a married pair, does a partnership justify additional filing and tax requirements?
• Do you want to officially include others when making decisions, or would it primarily be your responsibility to direct the LLC?
• If using a multi-member LLC with members across state lines, which state should you register in?

That said, it’s possible to amend your registration in the future. You can add and remove members as your company develops, and even shift to a corporate structure later on.

Most registration services also make it easy to register across state lines by filing a foreign qualification, which can be useful as you grow your company.

What to do after you’ve registered your business

Registering your business, or amending your filing to add additional members to your LLC, is a big step forward in your business.

It can change how you file taxes and add additional support in case of bankruptcy. But for expanding businesses, shifting from a single-member to a multi-member LLC is often a step towards expansion.

That said, once that paperwork is filed — what’s next?

If your business is growing, it’s time to start hiring help. For small businesses just starting out, it’s often more cost-efficient to bring on independent contractors to complete smaller jobs or help out with things like marketing and sales.

Businesses that have chosen to add on new members may feel comfortable with part-time workers or freelancers because it’s easier to manage cash flow as you enter a new stage in your journey.

But the rules around independent contractors and freelancers can, at times, feel ambiguous. That’s one of the reasons we drafted our extensive Guide to Hiring Independent Contractors and Freelancers. We talk about everything you need to know, from worker classification to creating contracting agreements and setting security measures.