Forming a multi-member LLC
Forming an LLC is fairly simple, even if you’re going to have a multi-member LLC. But just like any new business, you’ll need to complete a bit of paperwork before you can get started.
Registering your new multi-member LLC
Most states will ask you to fill out a simple one- or two-page form, called your articles of organization or something similar. The requirements can vary slightly, but usually you just need to provide some basic information about your business.
The name and address of your business
Your business’ purpose
Your registered agent’s name and address
The name(s) and address(es) of the person(s) organizing the LLC
The last point is the main difference between a single-member and multi-member LLC. With a single-member LLC, you’re the only one organizing it. But most states require you to list all the organizing members of a multi-member LLC.
As far as your registered agent, they can be a person or a business you hire to fill this role. Your LLC can also be its own registered agent if it has a physical address in the state where you register.
Operating agreement for a multi-member LLC
While the registration process is similar for single-member and multi-member LLCs, the day-to-day operations get trickier the more members you have. You can avoid a lot of problems by having an operating agreement.
You generally don’t need to file your operating agreement with the state, but it’s a good idea to make drafting one part of your formation process. If you don’t have one, state rules will govern your operations, and they might not suit your business.
Make sure your operating agreement defines the rights and powers of each member and manager. It can also outline any operating decisions you want to include.
Management structure. You can have a member-managed LLC, with all members actively involved. Or you can appoint one or more members as managers (or hire outside managers), and have the other members stay out of daily decision-making. (This is known as a manager-managed LLC.)
Division of responsibilities. Even in a member-managed company, you may want to divide responsibilities according to each member’s strengths. For example, certain members may be responsible for hiring decisions, others for purchasing, sales, advertising, etc.
Membership interest. Members don’t necessarily share ownership equally. Your operating agreement should clearly state how much of the company each person owns.
Profit distribution, losses and tax responsibilities. How and when are profits distributed? Will members take profits (or claim losses) according to their membership share? Is your LLC a flow-through tax entity (the default) or will you elect to be taxed as a corporation?
Adding or subtracting members. How will you handle a member leaving the company, or the addition of new members?
Keep in mind that you can amend your operating agreement if you discover you forgot or need to change something. You should include procedures for how to do this in the agreement.
Converting a single member LLC to a multi-member LLC
If you’re the sole owner of an LLC but want to take on one or more partners, you can convert your company from a single member LLC to a multi-member LLC.
To do this, you file an amendment to your articles of organization with the state agency where you originally filed your articles. This amendment names your new partner(s). You’ll also want to amend your operating agreement (or draft one) to add the rights, responsibilities and membership share of the new members.
Finally, you’ll need to notify the IRS of the change. Your default tax status will change from a disregarded entity to a partnership. In some circumstances, you may also need a new employer ID number (EIN).
If you have any questions about registering or operating your multi-member LLC, consider talking with a business attorney in the state where you’re organizing.