Single-member LLC vs Multi-member LLC: Key Differences Explained

Both single-member LLCs (SMLLCs) and multi-member LLCs (MMLLCs) provide personal liability protection for their members’ personal assets. This means the business owners are not responsible for the business debts and obligations.

The business formation of SMLLCs and MMLLCs as a legal entity is straightforward and done with the secretary of state or state office. Typically you file articles of organization with the business name, registered agent name and address, number of members, and LLC purpose. Each state has different LLC formation rules, filing fees, and annual report requirements, but the formation documents are similar.

However, after formation, each business structure has various differences, especially when it comes to the ownership structure, tax filing, and who runs the LLC.

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What is a Single-Member LLC?

A single-member LLC is a limited liability company owned and managed by one member. That member can be an individual, another LLC or corporation, or a foreign individual or entity.

Who Manages a Single-Member LLC?

Because a single-member LLC only has one member, that member has complete control of all the decision-making and running of the LLC.

Even though a SMLLC has a sole owner, it is a good idea to draft an operating agreement. Some states require an LLC to have an operating agreement, but if yours does not, it is a good idea to have it anyway. An operating agreement outlines the management structure, profit distribution, and process for dissolution or continuity of the LLC. Often a bank or financial institution may want to see the LLC operating agreement in order to open up a business bank account or get a loan.

How Is a Single-Member LLC Taxed?

A single-member LLC is treated as a “disregarded entity” for tax purposes by the IRS. A disregarded entity means the IRS ignores the single-member LLC as its own entity and allows the member to include the business income on the individual member’s personal tax return. This “pass-through taxation” is a similar tax treatment to a sole-proprietorship. If the member does not have employees, they may not have to file for an employer identification number (EIN), but can use their own social security number.

The individual member files a Schedule C along with their Form 1040 income tax return. The LLC does not pay a corporate income tax, but is taxed at the individual member’s income tax rate. However, the SMLLC may elect to be taxed as a C corporation by filing IRS Form 8832, Entity Classification Election.

What is a Multi-Member LLC?

A multi-member LLC, or MMLLC, is an LLC owned by two or more individuals, corporations, LLCs, partnerships, or foreign business entities.

Who Manages a Multi-Member LLC?

There are two types of management structures of a multi-member LLC: member-managed or manager-managed. A member-managed LLC means the members all participate in the management and decision-making. A manager-managed LLC means the members elect a manager or managers to make the day-to-day decisions, and the other members take a more passive role in the LLC, akin to a silent partner. The manager does not have to be a member of the LLC.

Because there are more members involved, the LLC should have an operating agreement. This agreement should detail the roles and shared responsibilities of the members, who makes decisions, and what happens if a member leaves the LLC.

How Is a Multi-Member LLC Taxed?

A multi-member LLC is treated as a partnership for income tax purposes. The LLC owners each receives a Schedule K-1 form and the LLC files Form 1065.

The MMLLC should have an employer identification number to file taxes.

Key Differences of SMLLCs and MMLLCs

Get Legal Help with Your Startup

There may be other factors when deciding on your type of business beyond being a sole proprietor forming a single-member LLC for personal asset protection or a multi-member LLC deciding which business partners should manage the company. A business attorney can help identify what options align best with your business goals, draft legal documents, and identify the tax implications of each structure.