SERVING INDIVIDUALS, BUSINESSES, LAW FIRMS, AND CPA'S FOR OVER 40 YEARS
If you're starting an LLC, one of the first decisions you'll make is whether your company will have one owner or multiple owners.
The good news is that both single-member and multi-member LLCs offer many of the same benefits, including liability protection and flexible management. The biggest differences come down to ownership, taxes, and how business decisions are made.
Let's take a look at the differences between single-member and multi-member LLCs so that you can choose the structure that best fits your business.
LLC Member vs. Owner
Before we jump in, it's worth noting that LLC's don't technically have owners. The owner of an LLC is called a member. An LLC can have a single member or multiple members.
What Is a Single-Member LLC?
A single-member LLC is an LLC owned by one person or one business entity.
This is one of the most common business structures for freelancers, consultants, and small business owners who are starting a company on their own.
Although there is only one owner, the LLC is still a separate legal entity from its owner. That separation helps protect the owner's personal assets from many business debts and liabilities.
What Is a Multi-Member LLC?
A multi-member LLC is owned by two or more people or business entities.
The members may be business partners, spouses, family members, friends, or investors. Each member typically owns a percentage of the company, although ownership percentages do not always have to be equal.
Most multi-member LLCs have an Operating Agreement that outlines each member's ownership interest, responsibilities, voting rights, and how profits and losses will be distributed.
Single-Member LLC vs. Multi-Member LLC
While both types of LLCs provide many of the same legal protections, there are several important differences.
Single-Member LLC
- One owner
- Default federal tax treatment as a sole proprietorship
- One person makes business decisions
- Simpler ownership structure
- An Operating Agreement is strongly recommended
Multi-Member LLC
- Two or more owners
- Default federal tax treatment as a partnership
- Business decisions are shared among members
- Ownership percentages should be documented in an Operating Agreement
- An Operating Agreement is strongly recommended
The biggest difference is ownership. A single-member LLC is owned by one person or business entity, while a multi-member LLC is owned by two or more people or entities.
Tax Differences
By default, the IRS treats a single-member LLC as a pass-through entity for federal income tax purposes. This means the business income is generally reported on the owner's personal tax return.
A multi-member LLC is generally taxed as a partnership by default. The LLC files an informational tax return, while profits and losses pass through to the individual members.
Both single-member and multi-member LLCs may also choose to be taxed as an S corporation or C corporation if that better fits their business goals. Business owners should consult a tax professional to determine which tax election is most beneficial for their situation.
Liability Protection
Whether your LLC has one owner or several, the liability protection is generally the same.
An LLC creates a legal separation between the business and its owners. When the company is properly formed and maintained, this separation can help protect the owners' personal assets from being affected by the businesses financial and legal obligations.
However, owners should keep business and personal finances separate, maintain accurate records, and follow all legal requirements to preserve those protections.
Management Differences
A single-member LLC is usually straightforward to manage because one owner makes the business decisions.
With a multi-member LLC, members should establish clear expectations about how important decisions will be made. An Operating Agreement can help avoid misunderstandings by explaining voting procedures, ownership percentages, member responsibilities, and what happens if a member leaves the business.
All LLC formation packages from The Incorporators come with a template Operating Agreement for you to edit to fit the needs of your company.
Can You Add Members Later?
Yes.
Many businesses begin as single-member LLCs and later add partners or investors.
When a new member joins the company, the LLC's ownership structure changes from a single-member LLC to a multi-member LLC. This is typically done via an update to the operating agreement.
Which Option Is Right for You?
A single-member LLC may be a good choice if you:
- Are starting your business alone
- Want complete control over business decisions
- Prefer a simple ownership structure
A multi-member LLC may make sense if you:
- Are starting a business with one or more partners
- Plan to share ownership and profits
- Want to combine resources or investments with other owners
The right choice depends on how you plan to own and operate your business.
Frequently Asked Questions
Can a husband and wife own an LLC together?
Yes. A husband and wife may own an LLC together. How the LLC is taxed depends on several factors, including the state where they live and how they choose to file their taxes.
Does a single-member LLC need an Operating Agreement?
While Delaware does not require an LLC to have a written Operating Agreement, having one is strongly recommended. An Operating Agreement helps document how the business will operate and can be useful when opening a business bank account or resolving future questions.
How do a get an operating agreement?
Operating agreements can be drafted by the members themselves or a legal professional. Many LLC members use a template operating agreement to start and make changes to meet their needs. Our LLC formation packages come with a template operating agreement for you use and customize.
Does a multi-member LLC need an EIN?
In most cases, yes. Multi-member LLCs generally need an Employer Identification Number (EIN) from the IRS, even if they do not have employees.
We have a full tutorial on how to get an EIN number here.
Can I change from a single-member LLC to a multi-member LLC?
Yes. You can typically add one or more members after your LLC has been formed. Depending on your situation, you may need to update your operating agreement and make changes to your tax reporting.
Start Your Delaware LLC with The Incorporators
Whether you're forming an LLC on your own or with business partners, choosing the right ownership structure is an important first step.
The Incorporators Ltd. has helped entrepreneurs form Delaware businesses for decades. We offer easy online ordering and can help you start your Delaware LLC quickly and accurately, whether you're starting as a single-member or multi-member company. Get started here.