When constructing a building, it’s necessary to put a framework in place before adding everything else.
This skeleton provides support and protection for the building as it endures weather, aging, and general wear and tear. In the same way, a business framework can help ensure your company’s long-term stability and protection.
A multi-member LLC is a business entity type that offers legal protection, tax flexibility, and much more for any business with multiple owners. It’s a great option for anyone looking to legitimize their business and establish more structure within their company.
That said, not everyone needs to form a multi-member LLC. This guide will outline all the pros and cons and set out directions for forming one, giving you a better understanding of how it might work in the context of your current business.
What Is a Multi-Member LLC?
The basics of a multi-member limited liability company (or MMLLC) are right there in the name. It’s a structure for a business with two or more members/owners. But that’s just the tip of the iceberg.
The MMLLC structure also protects members’ personal assets. Let’s say your business is sued and the court rules against it. If you’ve established an MMLLC, it distinguishes your business as a separate entity from you as an individual, so creditors can’t come after personal assets like your house, car, personal bank accounts, and more. Instead, they can only pursue your business assets.
Many multi-member LLCs start out as partnerships, and this limited liability protection is a major benefit because partnerships do not receive this personal asset protection. Each state has its own rules and regulations for MMLLC formation and ongoing compliance, so check your state’s website to familiarize yourself with its procedures. That said, there are some general guidelines that can help you prepare to form your business.
Why Should I Form a Multi-Member LLC?
An MMLLC doesn’t just protect your assets, it protects your reputation too. General partnerships aren’t formal business entities, and they don’t require registration with your state government. But as a state-registered business entity, an MMLLC has much more legitimacy in the eyes of courts, banks, other businesses, and more. If you’re looking to increase your casual partnership’s legitimacy, one way is to form an MMLLC.
Plus, if you’re dissatisfied with how your partnership is taxed, a multi-member LLC will give you options. By default, MMLLCs are taxed like partnerships, but you can choose to have it taxed like an S corporation or C corporation instead. This gives you some authority over how you pay taxes on your business income, so you can find the best option for your growing company.
Most entrepreneurs choose to have their MMLLCs taxed as partnerships though, because this enables you to avoid the double taxation model of most corporations ― when taxed as a partnership, you only pay taxes on company profits on your personal return, whereas with corporation-style taxes, you’re required to pay taxes on those profits both on your personal return and on a separate corporate return.
Another major benefit of the multi-member LLC is the way this business structure protects your business name from being used by other entities. An MMLLC’s name is registered with your state of formation, a general partnership’s name is not. Once a name is on record with the state, it’s off-limits to everyone else, but your partnership’s name could still be registered and used by other businesses.
Lastly, let’s talk money. If you plan on pitching investors on your company, know that as a legal business entity, a multi-member LLC is a more attractive business type. Partnerships are just extensions of their owners, and investors are more wary of handing their money to a group of individuals than an established business.
Why Should I NOT Form a Multi-Member LLC?
After all those advantages, you might be thinking: “That sounds great. Sounds like the MMLLC is the best way to go!” But this isn’t always the case. Yes, it’s a great option, but it isn’t universally ideal for every business.
For starters, the MMLLC formation process can be a bit of a time-consuming hassle, especially when you consider that a general partnership doesn’t require a formation process at all. If you’re short on time to start doing business, running with a partnership is the quickest way to get going. You can always form an MMLLC later on if you’d like.
It’s an investment of money too, not just time. Though they’re much cheaper than corporations, multi-member LLCs still have to pay formation fees, which don’t apply to partnerships. Then, there are often ongoing maintenance fees to consider. While these fees vary by state, they definitely make the multi-member LLC a more expensive business structure to form and maintain than a general partnership. So, glance over your state’s formation and maintenance fees, and if your budget is looking tight, you might start with a partnership instead.
How Do I Form a Multi-Member LLC?
Even though there are fees involved, the act of forming a multi-member LLC is pretty simple. You’ll just need to get your hands on the documents known as the Articles of Organization. Some states call these the Certificate of Organization or Certificate of Formation, but they serve the same purpose: forming your LLC. In general, your articles will need to include the following information:
- Legal name of your company
- Physical address of your MMLLC
- Name and address of your registered agent
- Name(s) of your MMLLC’s owner/member(s)
- Name of your MMLLC organizer
- Identity of your MMLLC manager (if applicable)
Check your state’s business forms page (often on the Secretary of State page), and you’ll likely find a standard Articles of Organization document. Different states have various filing procedures, although the options generally include some combination of filing by mail, in person, and online.
How Much Does It Cost to Form a Multi-Member LLC?
The filing fees for multi-member LLCs vary considerably depending on your formation state. A few states, like Arkansas and Kentucky, allow you to file your Articles of Organization for under $50, but others, like Tennessee and Massachusetts, charge hundreds of dollars to form an MMLLC.
For a comprehensive breakdown of the LLC formation costs by state, take a look at our guide to LLC formation and ongoing compliance fees in all 50 states!
Can I Hire Someone to Form My Multi-Member LLC?
You’re totally capable of forming your multi-member LLC DIY-style. But entrepreneurs are busy people, so you simply might not have the time to take it on. Or maybe you’d just feel more comfortable leaving it in the hands of an expert. There are a couple of reliable sources for LLC formation assistance.
One popular route is to hire a business lawyer who will draft and file your documents. This option certainly offers the peace of mind that the process will be completed by a true expert, but this expertise often comes at a cost. Attorneys’ fees aren’t cheap, so this option might not be financially realistic for all business owners.
If it’s expertise that you want, but you’d rather not break the bank for it, you can hire an online incorporation service. A reputable formation service provider will professionally form your new company at a fraction of the cost of a lawyer’s fees. Knowledge and affordability – these companies offer both. There are quite a few incorporation services out there, so if you’re interested in this route, here are three of our top recommendations:
- ZenBusiness – $39: ZenBusiness is the LLC formation service with the best overall value and included features. While they don’t have the extensive track record as the two options below, they’ve formed thousands of businesses so far and very positive online reviews.
- IncFile – $0: With the lowest price points in the industry, IncFile is always a strong contender for multi-member LLC formation services. They will include a year of premium registered agent service when you hire them to form your LLC, and they do all this without forgetting about customer care. IncFile’s customer reviews are generally positive and business owners report high levels of satisfaction with their work.
- Northwest Registered Agent – $79: Northwest also bundles a year of registered agent into their LLC formation packages, and they’re the only mainstream service provider that locally scans every document they receive as your agent ― their competitors only scan government-issued docs. And if you thought IncFile’s customer service looked great, wait until you see Northwest’s. They offer highly-personalized customer support that makes their higher price well worth it in our opinion.
Each of these companies offers different features and advantages, but each will form your multi-member LLC quickly and correctly, leaving you with more time to plan and grow your business.
Whether you’re starting a business for the first time or you’ve been running a general partnership for some time, a multi-member LLC’s benefits make it worth considering.
It might be a small investment to form and operate, but in the end, an MMLLC offers some invaluable advantages, like business legitimacy and tax flexibility. We think that these benefits far outweigh the drawbacks.
And remember, the formation process doesn’t have to be intimidating. You can always partner with a professional to take that burden off your shoulders. MMLLC or not, the fact that you’re reading this guide means you’re a thoughtful and dedicated business owner which, we hope, will lead to plenty of success down the road!