The prospects of starting a new venture in partnership with others can be quite thrilling yet daunting. One of the most critical decisions that should be made early on is the business structure.
For most entrepreneurs, the Multi-Member Limited Liability Company (MMLLC) provides the desired combination of compliance, protection, and complexity.
This guide will cover the essential aspects underpinning the formation of Multi Member LLC, from selecting a business name to fulfilling obligations of compliance post-formation.
What is Multi Member LLC?
Multi Member LLC (MMLLC) is a type of business entity whose ownership is jointly held by a minimum of two individuals (or entities). Just like single member LLC, an MMLLC also provide limited liability protection which means that the personal holdings of the members are in most cases protected from the company’s obligations and legal liabilities.
What differ MMLLC from other business entities its multi-owner structure which facilitates active participation in decision-making, division of labor, and sharing of profits.
It also offers a distinct framework for legal contracts among business partners who would otherwise be in informal partnerships to minimize the conflicts by defining the responsibilities and functions of every member.
Key characteristics of a Multi-Member LLC include:
- A minimum of two members (owners)
- Default taxation as a pass-through entity (taxed as partnership)
- Members have limited liability
- An operating agreement that can be tailored to detail control and ownership hierarchy
Advantages of a Multi-Member LLC
A Multi-Member LLC is ideal for small business owners and entrepreneurs with multiple founders due to these reasons:
1. Limited Liability Protection
Members’ personal assets are protected from the company’s debts, lawsuits, and obligations. Generally, members can’t be personally responsible beyond their investment in the business if it is sued or incurs debt.
2. Pass-Through Taxation
An MMLLC will, by default, be treated as a partnership by the Internal Revenue Service (IRS) for taxation. The business does not pay income tax. Instead, profits and losses are allocated to each member and reported on their personal tax return, thus helping eliminate double taxation.
3. Operational Flexibility
Operational flexibility is granted when compared to corporations. LLCs have greater freedom from set internal governance structure and compliance rules. The business can choose between two options: run the business themselves (member-managed) or hire managers to run day-to-day operations (manager-managed).
4. Enhanced Credibility
Having an LLC structure improves your business image, demonstrating to clients, business partners, and investors that you’re running a serious professional business.
5. Flexible Sharing of Ownership and Profit Distribution
An MMLLC allows for complete flexibility in the percentage distribution of ownership, profits, and even voting rights. These items are always included in the operating agreement.
Step-by-Step Instructions in Creating Multi-Member LLCs
Creating an MMLLC requires several processes ranging from legal actions to administration. This is what needs to be done:
Step 1. Pick a Name for Your Business
To begin, get an exclusive name for your LLC. The name has to:
- Be distinguishable from other registered businesses in the same state
- Contains the phrase “Limited Liability Company” and abbreviation “LLC” or “L.L.C.”
- Not contain prohibited terms such as “bank,” “insurance,” “university,” without secific license permits.
Consider performing a trademark search on national documents to reclaim your brand identity to secure trademark protection.
Step 2. Choose A State of Registration
Registration of your LLC can be in any of the US states. If you and your partners are primarily operating from one state, it is the most useful place to register your company.
But, a number of entrepreneurs prefer LLC friendly states like:
- Delaware: Popular for its Pro Business Legal Environment and Court.
- Wyoming: Low cost, great privacy, and no income tax, all in one state.
- Nevada: Low Business Taxes, including no corporate income taxes.
Be careful, if your LLC operates in a different state from which it was formed, you may need to obtain foreign LLC registration and follow rules from both states.
Step 3: Appoint a Registered Agent
Every LLC must have a registered agent, an individual or business entity that is responsible for receiving official company documents, tax correspondence, legal papers, and other required communication on behalf of the LLC.
The registered agent must:
- Have a verified address in the state of formation.
- Be reachable during standard working hours.
- For an LLC, be eligible to receive legal documents in the name of the LLC.
For business anonymity, legal protection, and privacy, many entrepreneurs hire professional registered agent services.
Step 4: Filing the Articles Denoting The Organization
This document “Articles Denoting the Organization” enables you to establish your LLC in your state. Depending on the State, it is also known as Certificate of Formation, Certificate of Organization.
Among the necessary details are the
- Name of the LLC and the primary place of business
- Registered agent’s name and address
- Member’s names (some states allow this to be optional)
- Why the LLC was created (perpetual or limited)
- Reason for the business (required or optional depending on the state)
Filing fees may vary from $50 – $500 depending on the state. You can either send a form online or via mail to the Secretary of State, or the state agency that oversees such submissions.
Step 5: Create an Operating Agreement
Legally, an operating agreement may not be essential, but for a Multi-Member LLC, it is one of the most vital documents. This is practically the internal constitution of the company.
It must encompass:
- Percentage of ownership of the members
- Voting rights and mechanisms for key decisions and policies
- Capital injections by every investor
- Acquisition of profit and loss by the company
- Roles and functions of the members
- Rules pertaining to the admission or termination of members
- Ways to resolve potential conflicts and mean for dissolving the company
The absence of a defined operating agreement means that a your LLC is preconditioned to the default statutory requirements in your state, which are unlikely to be in your best interests.
Step 6: Request an EIN (Employer Identification Number)
An EIN is the same as a Social Security Number but for your business. It is needed to:
- Set up a business bank account
- Open a business bank account
- Pay state and federal taxes
- Add employees to the payroll
You can apply online for no cost via the IRS portal. If you are a foreign national without a Social Security Number, you will have to complete Form SS-4 and fax or mail it. Alternatively, services that expedite the process such as Bizstartz can be used.
Step 7: Open a Business Bank Account
Separating personal accounts from business accounts helps in:
- Safeguarding private property
- Keeping legal liability protection intact
- Using accurate records for financial, accounting-related and taxation purposes
Most banks require:
- Business EIN
- Articles of Organization
- Operating Agreement
- Valid photo identification for all business members
Consider using banks that have low fees, online banking, and bookkeeping program integration capability as your primary financial institution. Best bank features include online banking, low service charges, and integration capable countering tools.
Step 8: Set Up For State and Local Taxes
Depending on your location and nature of business activity, you may be required to;
- Enroll for state sales tax permits.
- Obtain local business licenses or zoning permits.
- Enroll in state employer taxes if you are going to hire employees.
Do not take care of state tax and business licensing rules, and you risk incurring fines, or being forced to cease your business. You can visit the Department of Revenue for your state or consult a tax compliance professional to avoid any trouble.
Step 9: Maintain Ongoing Compliance
After forming the MMLLC, ensure you comply with state and federal jurisdictions to ensure you are in good standing. This may consist of;
- Submitting Annual Reports or Statements of Information.
- Improving your business documents or permits.
- Having the correct files and books.
- Submitting your Beneficial Ownership Information (BOI) to FinCEN under the Corporations Transparency Act.
- Clearing any outstanding franchise or state fees.
Being the fall of compliance may result in fines, diminished liability protections, or forced extinction of your LLC.
How Multi-Member LLC Works
Is treated by the IRS as a partnership and a multi-member LLC(MMLLC) is usually taxed as an MMLLC. This indicates that the LLC does not pay taxes on income received. Instead:
- Every member earns a Schedule K-1 which lists each member’s apportioned shares of a profit or a loss.
- Members are required to declare these earnings on their tax returns, which is Form 1040 along with Schedule E, as income.
However, it is possible for your MMLLC to opt for taxation as:
- An S Corporation: If the self-employment tax can be lowered for you per eligibility requirement.
- A C Corporation: Ideal for Corporations that wish to reinvest earnings or lure in investors.
To achieve the desired business goals, revenue, and structures, it is advisable to consult a tax advisor beforehand.
Can Non-Residents Open a Multi Member LLC?
Absolutely! Foreign citizens can freely create an MMLLC in the United States. Anyone can be a member of the LLC meaning there are no restrictions based on residency or citizenship.
That said, there are a few special considerations:
- A registered agent with an address located in the U.S will be required.
- If you do not possess a social security number, applying for an EIN through different protocols becomes essential.
- You could have U.S. tax liabilities, and you need to follow the IRS guidelines regarding foreign ownership and reporting (e.g., tax return reporting on Form 5472 for foreign controlled corporations).
Bizstartz can help foreign owners with the entire formation, literally from state selection to setting up an EIN, banking, and beyond.
How Bizstartz Can Help You Form a Multi-Member LLC
It is easy to get lost in the legal and tax mazes of the U.S; this is why Multi-Member LLC formation might seem daunting. This is exactly where Bizstartz helps out.
We offer complete formation packages that include:
- LLC formation across all US states
- EIN Application (residing outside of the US is not a barrier)
- Registered Agent services
- Tailored Operating Agreements
- BOI Filing (fulfilling CTA requisites)
- Opening a business bank account
- Proactive compliance management and filing annual reports
While you focus on growing your business, leave the tedious and time-bound tasks to us at Bizstartz.
Conclusion
Multi-Member LLCs provide robust protection while offering flexibility and simplicity, which is perfect for co-owners hoping to build a scalable business together. Following the steps detailed above, paired with relentless compliance, will enable you to lay a solid legal foundation for your business.
Guided by a reliable strategy, forming an MMLLC allows you to expand your horizons whether you are starting a U.S-based company with local partners or bringing together international co-founders for a global initiative.
Do you want to form your own Multi-Member LLC?
Let Bizstartz take care of the heavy lifting. Our experts handle everything from formation to compliance, so you can focus on growing your business with confidence.
Frequently Asked Questions (FAQs)
1. Is it mandatory for all members to have U.S. citizenship?
No. Ownership of a Multi-Member LLC is open to foreigners. Citizenship or residency does not need to be proven. However, non-residents will most likely have additional tax reporting obligations.
2. Is Operating Agreement a must?
In most states, the answer is no, but having one is strongly advisable. It lays boundaries regarding ownership and responsibilities along with minimizing conflicts.
3. Is it possible to tax an MMLLC as an S Corp?
Absolutely. An MMLLC can opt for S Corporation status through the IRS which helps in reducing self-employment taxes.
4. In what proportion is profit share out?
As a default, profit is shared equally amongst members who can further customize profit share in the Operating Agreement by means of agreed terms.
5. What if one of the members no longer wants to continue?
Exiting procedures will be laid down in the Operating Agreement, otherwise state laws will be applied which may require consent from other members or put the company in a voluntary dissolution scenario.
