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Multi Member LLC: How to File Taxes and Pay Yourself?

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Opening a medical practice or business can be rewarding, but it’s not without its hurdles. What if your company faces a lawsuit or gets into debt, will you be protected?

My motto: Hope for the best, prepare for the worst. Multi-member LLCs shield your personal assets if your practice gets into trouble. You also get the chance to welcome unlimited owners to drive the business to new heights.

But how will forming an MLLC affect your taxes and how does it stack up against a single-member LLC? Let’s dive in to shed light on the best path forward.

This article will include:

  • Everything to know about multi-member LLC taxes.
  • How to set up an LLC with multiple owners.
  • Whether a single or multi-member LLC is better for you.

Read more:

What Is a Multi-Member LLC?

A Multi-member LLC (MMLLC for short) is an LLC with two or more owners, known as members. An MMLLC offers the best of both worlds: the flexibility of a partnership and the protection of limited liability.

Like a single-member LLC, an MMLLC is a separate legal entity from the owners, so their personal assets are shielded from the company’s debts and legal troubles.

If the business hits a rough patch or gets tangled up in a lawsuit, your personal assets, like your house, car, or vintage comic book collection, are safe from the fallout.

Each member typically has a say in the company’s major decisions, which should lead to a more collaborative and inclusive environment. However, with all those chefs in the kitchen, MMLLCs are about having clear agreements and communication channels to keep things running smoothly.

How Does a Multi-Member LLC Operate?

Once you’ve decided an MMLC is right for you, it’s time to register with the state and get a tax ID number. Registering will set you back around $100, plus you’ll need the correct licenses and permits for your location and industry.

A big bonus of an MMLLC is that you can have unlimited members in the company – just think carefully about who comes on board as each member brings something to the table. Whether it’s skills, cash, or connections — members have a stake in the company and can speak up about big decisions, like who will run operations.

MMLLCs can elect one member to manage the company or opt for a manager-managed MMLLC by bringing in a third party. On the flip side, if everyone rolls their sleeves up and shares the load equally, you’re looking at a member-managed setup.

So who can be a member? Almost anyone. Your team can consist of individuals, corporations, other LLCs, and foreign entities. If you’re opening your own practice, you can keep it in the family, set up with a group of friends, or the brave can even go into business with a spouse.

How Is a Multi Member LLC Taxed?

By default, MMLLCs are treated as partnerships in the tax arena. But you’re not limited to just one tax classification – multi-member LLCs can choose to be taxed as an S corp or a C corp by filing Form 2553 or Form 8832 respectively.

Note: Filing for an S Corp can help you avoid self-employment taxes but at the cost of rigid rules and a limit of 100 shareholders.

Multi-member LLCs are pass-through entities, so the company doesn’t pay taxes directly. Instead, business income or losses are reported on the owner’s personal tax returns.

Members receive their share of profits and losses irrespective of whether they get any cash from the business. Even if they don’t take distributions, they still have to report their portion of profits and pay the tax. It’s all fair game, and each member’s allocation depends on their ownership percentage.

When tax season rolls around, be prepared for the dreaded paperwork.

Your MMLLC has to file Form 1065: U.S. Return of Partnership Income, to report annual profit and losses. Each member also gets a rundown of their share of profits or losses after the company completes the Schedule K-1 forms. 

Then you have the employment tax trifecta: Social Security, Medicare, and income taxes. The MMLLC generally pays 15.3% in self-employment taxes on behalf of its members or employees. Members also need to report their share of earnings to pay income taxes.

If you’re new to the game or need some extra help with tax planning, it’s worth talking with a tax strategist who can help you navigate all the ins and outs.

How to Pay Yourself in a Multi-Member LLC?

One way to line your pockets is by getting a chunk of your profits through a distribution. However, distributions and allocations play by different rules – so your allocation amount might be more than the distribution you receive.

Your MMLC could also elect to be taxed as an S Corp and then pay yourself a salary to lower taxes. So, if you’re making $100,000 – you can pay yourself 60% in salary and 40% as distributions. This could save you a solid amount as you don’t need to pay Medicare, personal income, or Social Security taxes on distributions.

Note: Make sure your salary is based on experience and industry standards or the IRS could hit you with steep penalties.

How to Form a Multi Member LLC?

First, you’ll need to gather a team — whether a US resident, a non-U.S. citizen, or a corporate entity, everyone’s welcome. Just check your state rules. Most only require members to be 18 years or older.

Now, here’s where the paperwork parade begins. Since the state regulates LLCs, you need to file your articles of organization with the secretary of state. You’ll have to share details like your MMLC name, who’s steering the ship, and who else is on board.

Before your LLC’s grand entrance, there’s one document you shouldn’t skip – the operating agreement. It serves as the roadmap for LLC and often includes the following details:

  • Who does what and how decisions are made.
  • All the requirements and responsibilities.
  • How to make profit disbursements.
  • The best way to handle disputes.

Remember: Many states also require a registration fee of around $100.

Pros and Cons of a Multiple Member LLC

While forming a multi-member LLC can safeguard your personal assets, it’s not always smooth sailing. Remember those group projects in school? Running a business with multiple members has the same ups and downs but with way more at stake.

Here’s a rundown of all the MMLLC benefits and drawbacks: 

Pros

  • Unlimited members: There’s no member limit for a Multi Member LLC, and the rules are pretty flexible. Your team can include anyone from individuals to other LLCs or even corporations. Plus, it’s open to non-U.S. citizens.
  • Tax savings: Multi-member LLCs don’t have to pay corporate tax, and you can avoid self-employment taxes by electing to be taxed as an S Corp.
  • Personal asset protection: If your business gets into hot water, someone sues you, or you get into debt, only the business’s assets are at risk. Your personal assets, like your house or car, stay off-limits to creditors.

Note: Limited liability won’t protect you or your business from malpractice, so make sure to get solid insurance coverage.

Cons

  • Shared liability: When working with others, their actions and decisions can sometimes come back to bite you. If someone misuses funds or plays fast and loose with the law, you could find yourself in hot water.
  • Potential conflict: With each member bringing their ideas to the table, reaching a consensus can sometimes be a challenge. When some members have a larger slice of the pie or have poured more capital into the pot, balancing everyone’s interests and finding common ground takes some work.
  • New memberships: Depending on your state’s rules, you might find yourself dissolving and reforming the LLC every time there’s a membership shuffle — unless you’ve got a solid agreement for buying, selling, and transferring ownership.

Single Member LLC vs Multi Member LLC

The main difference between the two LLCs is the most obvious. Single Member LLCs are a one-person show, while Multi Member LLCs can have unlimited owners. 

Single Member LLC owners can wear all hats when calling the shots, while in a multi-member LLC, decision-making becomes a group effort. With multiple members on board, you’ve got more brains to pick, more opinions to consider, and potentially more conflict to squash.

But despite these differences, both Single Member and Multi Member LLCs share a common foundation.

They offer flexibility, simplicity in operation, and coveted limited liability protection where your personal assets are shielded from the business’s debts and legal troubles.

Tax Difference Between Single Member LLC and Multi Member LLC

Both single and multi-member LLCs share pass-through taxation — profits and losses bypass corporate taxes and go straight to the owners.

But here’s where the paths diverge: Single Member LLCs are disregarded entities, which means they’re automatically treated like sole proprietorships come tax time. Meanwhile, Multi-Member LLCs are taxed as general partnerships by default. 

When it’s tax season Single Member LLCs can skip the extra paperwork as there’s no need for additional forms or Schedule K-1s—profits and losses go directly on the owner’s personal tax return. With more members in the mix, multi-member LLCs must fill out extra forms and dish out Schedule K-1s to each member.

How to Change a Single-Member LLC to a Multi-Member?

One common scenario is adding family members to the mix for that extra layer of asset protection. Whether it’s your spouse, parent, or kid, bringing them on board as members of the LLC can help safeguard their assets, like cars and homes from the jaws of potential lawsuits.

Here are some simple steps to take when making the switch:

  1. Reach an agreement: Make sure everyone is on board with the changes – the way forward will require crystal-clear dialog and consensus.
  2. Update your LLC’s operating agreement: Amend the operating agreement to reflect the new membership structure. You may need to add names, change addresses, or update ownership stakes.
  3. File the paperwork: Once everyone’s on board with the changes, you need to file the necessary paperwork with your Secretary of State office to make it official. This could include updating your articles of organization by filing LLC articles of amendment.
  4. File for an EIN: Single-member LLCs with existing EINs will have to file for a new one as your multi-member LLC will be taxed as a partnership.

But remember, communication is key. Make sure to discuss roles, responsibilities, and expectations within the LLC with your new members. Lay down the ground rules for a successful partnership to ensure everyone’s on the same page from day one.

Is It Better to Be a Single Member LLC or Multi Member LLC?

Multi-member LLCs are perfect for shared business ventures where you have partners or family members ready to tackle the company together. Whether it’s a family business, a co-owned practice, or even a married couple diving into business ventures—Multi-Member LLCs offer that extra layer of protection, shielding all involved parties from personal liability regarding business expenses or debts.

Single Member LLCs have their perks, especially if you want to chart your course in the business world. With complete control over decision-making and operations, you’re the captain of your ship, steering the business in whichever direction you see fit.

FAQs

Is a multi-member LLC a disregarded entity?

No, a multi-member LLC is not considered a disregarded entity as there is more than one member. Instead, it’s typically taxed as a partnership by default. However, married couples could be taxed as a disregarded entity if both parties completely own the business as community property under state law.

How to change a multi-member LLC to a single-member LLC?

Transitioning from a multi-member to a single-member LLC involves filing a Form 8832, and members will have to sell their membership interests to the remaining member.

Next, you’ll need to file amended Articles of Organization with your state’s Secretary of State office and update your operating agreement to reflect the change in ownership structure. Additionally, you’ll want to review any tax implications that may come up from the transition.

Single or multi-member LLC for a married couple?

Generally, married couples form a multi-member LLC, which allows spouses to share ownership and responsibilities as a partnership. However, couples can also form a single-member LLC if they live in a community property state and file a joint tax return.



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