Short for limited liability company, an LLC is a legal business structure, established by state laws. If you’re on your own, you can start a single-member LLC, but if you have partners, you need a multi-member LLC. These two options offer a range of different pros and cons. Keep in mind that not all types of LLCs need to obtain a Tax ID Number. To help you decide between a single and multi-member LLC, here’s a look at the differences between these two business structures.
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Steps to Learning About Single-Member LLCs vs Multi-Member LLCs
1. Advantages & Disadvantages
With both single and multi-member LLCs, you establish the business as a separate entity from yourself, and that reduces your personal liability for business issues. In contrast, if you just have a sole proprietorship or a partnership, you and any other owners can be held personally responsible for the business’s debts and face personally liability if someone brings a lawsuit against the business.
If you opt for a single-member LLC, you get to run the business on your own. You get to focus on your business goals and objectives, and you don’t have to worry about making other owners happy. At the same time, however, you also have to personally deal with all the responsibilities related to owning a business, including hiring employees, dealing with vendors, responding to customer queries and everything in between, and that can be stressful.
In contrast, with a multi-member LLC, you get to reap all the advantages and disadvantages associated with running a company with multiple owners. You get the opportunity to brainstorm together and capitalize on each other’s ideas, and you get to share responsibilities with one or more other owners. That said, you also have to be willing to compromise, especially when your personal goals don’t mesh with the rest of the owner’s objectives for the company.
2. Ownership & Investment
As implied by the name, single owner LLCs just have a single owner. In most cases, that individual is personally responsible for investing in the company. With a multi-member LLC, the company has multiple owners. Generally, the owners invest in the company based on their share of ownership. For instance, if an LLC has three owners who are responsible for 50%, 25%, and 25% of the company respectively, they each make investments equal to those proportions.
That said, LLCs can also incorporate. If an LLC decides to incorporate, it can receive investments from shareholders. S-corporations can have up to 100 shareholders, while c-corporations can exceed that number.
Remember an LLC is a legal business structure and not a tax entity, and the taxation of these businesses varies based on the number of members and whether or not the business is incorporated. For tax purposes, an unincorporated single-member LLC is the same as a sole proprietorship. In other words, all the profits earned by the business pass to the owner. The owner includes an extra schedule with their tax return, detailing the business’s revenue and expenses. Then, they port the profits over to the rest of their tax return and pay personal income and self-employment tax on those amounts.
With an unincorporated multi-member LLC, the profits also pass to the owners, and the government taxes these businesses like partnerships. In most cases, the LLC submits its own tax return, but it’s just an informational partnership return. The LLC itself doesn’t pay any income tax.
The informational return reports all the company’s revenue and expenses for the year, and the difference between these amounts is the business’s profits. Then, the owner-members report their share of the profits on their own tax returns based on their share in the company. For instance, if the LLC earns $100,000 in profits and two owners each have a 50% stake in the company, they each report $50,000 on their personal tax returns.
If a single or multi-member LLC incorporates, the business now has to remit its own corporate tax return. It also has to pay corporate income tax on its profits. However, the exact tax requirements vary based on whether the company is a c-corporation or an s-corporation.
In all cases, if the LLC sells items or taxable services, it may need to collect and remit sales tax to the state where it does business. Additionally, these companies have to file and pay payroll taxes (Social Security contributions, Medicare premiums, and income tax withheld on behalf of employees) if they have employees.
To apply for an LLC tax ID (EIN) number online, you want to have your basic business information on hand:
- LLC Name as is or will be registered with your state.
- Responsible Party information including:
- Legal Name
- Social Security Number
- Physical Business Address
- Contact Phone Number
4. Purpose & Goals
Ultimately, the main purpose of any business is to earn profits for the business’s owners, and both single and multi-member LLCs share this common goal. Aside from that essential, your business may also have other purposes that can vary dramatically depending on your personal and business preferences.
For instance, your business may be an outlet for your creative passions. Alternatively, your business may be focused on helping certain parts of your community, bringing a new product to the world, providing a much needed solution to clients, or doing countless other activities. Both single and multi-member LLCs can focus on any of these purposes.
Generally, business owners develop goals for their businesses, and again, the goals of a single or multi-member LLC can be very similar. However, the process of determining goals varies based on the number of owners your business has. With a single-member LLC, you personally get to set your business’s goals. You may work with other people, talk to consultants, or crowdsource ideas with employees, friends, family, or clients, but ultimately, when you own the company, you decide on its goals.
In contrast, with a multi-member LLC, all the owners have to create goals for the company. To ensure everyone is on the same page, you may want to draft a mission statement for your company that outlines your key goals, and of course, you may want to update that list on a regular basis. You may also want to set up a protocol so that you can deal with different opinions easily. For instance, if some owners have a larger stake in the company, you may want to allow them to have a larger say in setting goals for your LLC.