So that small business you started on the side during the COVID-19 pandemic is finally starting to generate some income and you’re realizing it may be time to seriously evaluate what your long-term business structure is going to be.
In light of the strange times we’re living through, you might have started this business with a friend or family member. That gives you some options.
Below, we’ll weigh the pros and cons of a single-member LLC vs. a multi-member LLC. But first:
Why choose an LLC in the first place?
The LLC (Limited Liability Corporation) provides some basic advantages in either form. For starters, you get the asset protection of a corporation—a clear line is drawn between your business assets and your personal assets and creditors can’t touch the latter.
From a tax standpoint though, the 2 different types of LLC are treated a bit differently. The single-member LLC is considered a sole proprietor, while the multi-member LLC is a partnership.
But what they have in common is more important than what’s different:
In both single-member and multi-member LLCs, business income “passes through” to the personal tax return of the owners, thereby simplifying tax filing.
Where the key distinction will be how the business is managed. The asset protection an LLC offers doesn’t come without strings attached. All LLCs have business compliance tasks they must complete for the state. These tasks broadly include annual reports, annual meetings, renewing licenses and permits and the maintenance of a wide range of company records.
Benefits of single-member LLCs
A single-member LLC’s compliance requirements are a little simpler—not only in terms of the actual tasks but also in the process of carrying them out. One person is vested with the authority to make all decisions and process all the necessary paperwork.
Multi-member LLCs not only have a more complex task list, but they are faced with the challenge of getting majority approval on everything from contracts to getting loans in the running of the business.
Benefits of multi-member LLCs
But just like every coin has a flip side, the same factors that seemingly favor the single-member LLC can also work to the advantage of the multi-member LLC.
For example, the requirement for majority approval on loans and contracts can be seen as an opportunity for hearing a wide range of input and anticipating down-range problems that a single person might not have foreseen going it alone.
Also, if a multi-member LLC gets bogged down on decision-making, the business has the option to hire a manager and vest that person with sole authority to make decisions.
What LLC option is best for you?
The best situation for you will depend on your unique circumstances and the personal dynamic you have with the people you work with. These are important decisions to make.
Multiple people can create separate single-member LLCs. Or, if you work with your spouse, you can go either single or multi-member. Each small business will have a different path that works for them.