Single-Member LLC Vs Multi-Member LLC: What’s The Difference?

It’s important to understand the key difference between a single-member Limited Liability Company and a multi-member LLC before you start your business. These two legal structures vary in some distinct areas, but they also share a lot of similarities. So, continue reading below as we walk you through what a single-member LLC is, what a multi-member LLC is, and what the main differences are between them so you can select the option that’s right for your business’s needs.  

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What Is A Single-Member LLC?

Let’s start off by explaining what a single-member LLC is. It’s a limited liability company that has just one owner. There are some similarities to a sole proprietorship given that there is only one member, however, a single-member LLC is a bit more involved and requires more paperwork to be completed. But, setting up an LLC also creates a new legal entity, meaning that the business owner receives more legal protection when they have a single-member LLC as opposed to a standard sole proprietorship. 

Again, there is some extra paperwork involved with this process. When you set up a single-member LLC, you need to file an Articles of Incorporation with your state. 

What Is A Multi-Member LLC?

Now let’s discuss what a multi-member LLC is. Rather than just one member, there are multiple owners in the business, two or more members to be exact. These can be family members, friends, or other colleagues that you’ve connected with. 

Again, creating a multi-member LLC sets up the business as its own legal entity, still providing the owners with personal liability protection should their limited liability company enter into trouble. This sets multi-member LLCs apart from partnerships between two or more business owners–which doesn’t separate the owners from the business. 

When creating a multi-member LLC, the owners will need to determine the business structure and the specific percentage of ownership among each members Multi-member LLCs need to make sure this is clearly stated in their operating agreement to avoid future confusion or conflict. 

Pros & Cons Of Single-Member LLCs 

There are both advantages and disadvantages that come from setting up a single-member LLC, which we will now discuss in more detail. 

Pros

The primary reason for setting up a single-member LLC as opposed to staying as a sole proprietor is the extra legal protections you will receive. If your business finds itself in legal trouble, your personal assets will be protected under single-member LLCs, or limited liability protection. 

Another reason why a business owner would like a single-member LLC is that they can hold sole ownership of the business, and not have to consult with other people before making business decisions. This makes it a more simplified business structure like a sole proprietorship with only one person, but with personal asset protection. 

Cons

On the other hand, there are some disadvantages of having a single member LLC. In this case, there are a few more steps to filing the proper documents and registering your business with the state, which can be seen as a hassle. 

On the operational side, there are some roadblocks that the single member may face. For instance, they are the sole owner responsible for the business, including both administrative tasks and financial responsibilities. With this in mind, certain people like going into business with others because it adds more of a network to fall back on, which a single business owner may not have immediately available to them. 

Pros & Cons Of Multi-Member LLCs

We can now take a deeper look at multi-member LLCs to see what the pros and cons are of this business structure. 

Pros

Similar to a single-member LLC, setting up a multi-member LLC creates a separate legal entity that provides asset protection to the personal assets of the members. This is something that gives business owners the peace of mind that any legal troubles of the business will not impact their personal assets. 

Another pro of multi-member LLCs is that the business owners can share the burdens and responsibilities of the business with each other. Rather than being solely responsible for financially backing the company or putting in the work, the business partners can share this with each other. 

Cons

When running a multiple-member company, you have less control over your business since you’re sharing it with multiple members. This can get tricky when choosing what suppliers to work with, how to market your business, and other important decisions that may take a little longer to discuss among the members. 

This can also prove challenging when it comes time to split profits, as some may feel more entitled than others given the number of hours they put into the business, if they contribute capital to support operations, and more. 

Single-Member LLCs Vs Multi-Member LLCs: What’s The Difference?

Now you’ve learned a little bit more about the pros and cons of single-member and multi-member LLCs. So, let’s now see how the two stack up against each other. 

Tax-Time Responsibilities

These two business structures vary come tax season. A single-member LLC is typically not treated as separate from the owner, even though they have liability protections. This means the IRS sees the company’s income and your personal income as the same. So, you will not need to file a separate tax return, and can instead file them together with your personal tax return with a Form 1040 and a Schedule C typically, though each case may be different.  

On the other hand, multiple-member LLCs are taxed like a partnership for tax purposes, or individually through each member’s personal federal tax return. Each partner will report their portion of the business’s income, and pay the taxes on their own. In this case, each member needs to file a Schedule K-1 of Form 1065 to report their share of the business’s finances. The business will then file Form 1065 using each Schedule K-1. 

Decision Making

When you have multiple people involved in business decision-making, things can get a bit more complicated. Thus, single-member LLCs may have a more streamlined decision-making process than multi-member LLCs. However, there is also more brainstorming and creativity that can come from small businesses run by two members or more. So, there is some give and take with this aspect. 

Capital Investments

With multiple-member LLCs, the members share the responsibility of capital investments. With a one-person business like a single-member LLC, this falls on the sole owner. Thus, a multi-member LLC may have less of a financial burden for each of the owners compared to single-member companies. In turn, this portion of the investment may determine the amount of member’s membership interest each person is entitled to, which is something to keep track of in the operating agreement if you have a multi-member LLC. 

Top 2 LLC Services

Here are some of the top tools you can utilize to form your multi-member or single-member LLC, in addition to other convenient resources. 

ZenBusiness

ZenBusiness offers a business registration service in addition to other helpful services as your form your organization. They are known for their affordable pricing and excellent customer service. In addition to their LLC formation service, they can offer you annual report reminders, registered agent service, an EIN application, and more. 

Northwest Registered Agent

Northwest Registered Agent offers a variety of business formation services and ongoing support through their registered agent service. In addition, they can help you with LLC formation, annual report reminders, and provide you with a place to store and access legal documents. They can also help you create an operating agreement, provide you with mail forwarding and more for your convenience. 

Conclusion

There is no better choice between these two options, it’s all about what fits your business’s needs best. The main difference here is how many owners your business has, which comes with its own list of pros and cons. As always, consult with a legal expert for more personalized recommendations and advice when starting a business, though keep in mind the liability protection that each of these options will afford you. 

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