Single-member vs. multi-member LLC: what a second owner changes

Members and ownership

Owners of an LLCLLC An LLC (limited liability company) is a business entity registered with a state that exists separately from its owners. are called members. The IRS notes there is no maximum number of members, most states don't restrict who can be one, and most states permit single-member LLCs. Members may include individuals, corporations, other LLCs and foreign entities.

Default federal tax treatment

One member. For income tax purposes, a single-member LLC is disregarded as separate from its owner unless it files Form 8832 and elects to be taxed as a corporation. If the owner is an individual, the activity generally goes on Schedule C, and the owner pays self-employment tax like a sole proprietor. For employment taxes and certain excise taxes, the LLC is still treated as a separate entity.

Two or more members. A domestic LLC with at least two members is classified as a partnership for federal income tax unless it elects to be treated as a corporation. A partnership files an annual information return, Form 1065, but doesn't pay income tax itself. Profits and losses pass through to the members, and each one gets a Schedule K-1 to report their share on their personal return. Members of an LLC taxed as a partnership generally pay self-employment tax on their share, and partners are not employees who get a W-2.

Spouses who own an LLC together have special rules that depend on whether they live in a community property state. Ask your CPA which applies to you.

Operating agreement, ownership percentages and decisions

The operating agreement is the document where members write down who owns what percentage, what each person contributed, how profits and losses are split, who can make which decisions, and what happens when someone wants out. Whether your state requires one, and what rules apply without one, varies by state.

With one owner, it mostly documents that the business is separate. With two or more, it settles disagreements before they happen. The SBA notes that in some states, when a member joins or leaves, the LLC may have to be dissolved and re-formed unless there is already an agreement in place for buying, selling and transferring ownership. Have an attorney in your state draft or review it.

Adding a partner is more than splitting the money

• Your tax filing changes. By default, an LLC with two or more members is taxed as a partnership, so adding a member to a one-member LLC generally changes how it files.
• Ownership has to be decided and written down: how much each person owns, what each put in, and how profit is split.
• Decisions get shared. Who can sign for the business, borrow, or commit to a load?
• Exits need a plan before anyone wants one: buyouts, disputes, death or disability.
• If the LLC has an S election, a new owner has to be an eligible shareholder, and the one-class-of-stock rule generally means every ownership share has the same rights to distributions.
• Lenders and suppliers may ask each owner to sign a personal guaranteePersonal guarantee A personal guarantee is a promise that you, personally, will repay a business debt if the business does not..

Elections either one can make

A single-member or multi-member LLC can file Form 8832 to be taxed as a corporation, or, if it is eligible, file Form 2553 to be taxed as an S corporation. An eligible LLC that files Form 2553 on time doesn't also need Form 8832. See S corporationS corporation An S corporation is a federal tax status, not a kind of company you form with your state. An eligible corporation, or an eligible LLC, elects it with IRS Form 2553, and its income then generally passes through to the owners' personal returns. and C corporationC corporation A C corporation is a corporation taxed as a separate taxpayer under the regular corporate rules, which is how a corporation is taxed unless it elects S status. The corporation pays federal income tax on its profit, and shareholders may pay tax again on dividends. for what each changes.