Once you have decided to organize your business as a limited liability company (LLC), there are several choices to make regarding the details of its organizational structure. These include choices concerning the number of owners, how the business will be managed, and taxation.
An LLC is a type of business entity that is organized according to state law. It consists of "members," who are the owners of the business, and "managers," who conduct the day-to-day business operations. Members are similar to shareholders in a corporation, and managers are similar to corporate officers. Generally, an LLC is formed by filing a document with the state agency that regulates corporations and other business entities. The agency is most often the Secretary of State, and the filing document is called by various names, such as "articles of organization" or "certificate of formation."
Although not required in most states, it is a good idea for the members to sign an LLC operating agreement, which is a document that provides the details for the organization and operation of the business. The operating agreement is especially important if the LLC has more than one member, as this document will set forth how the LLC will be managed, how profits and losses will be allocated to each member, and how disagreements between members are to be resolved.
Regarding the membership structure, there are two types of LLCs:
- Single-member LLC. This is an LLC that has only one member, who is the owner of 100 percent of the business.
- Multimember LLC. This is an LLC that has two or more members. The members can either share equally in the profit or loss of the business or they can have unequal shares, as determined by the LLC operating agreement.
For either a single-member or a multimember LLC, there are two options for setting up the LLC's management structure:
- Manager-managed LLC. This is where the members hire one or more managers to run the daily operation of the business. The members do not take an active role in the day-to-day operation of the business. A hired manager is not a member of the LLC, and only has the authority specifically granted to him or her by the LLC operating agreement or by the members. This arrangement is more common in larger, multimember LLCs, where there are too many members to act efficiently in operating the business.
- Member-managed LLC. This is where one or more of the members also act in the role of manager. A member who also acts as a manager is called a "managing member." In a typical single-member LLC, it is very common for the single member to also be the managing member. In a multimember LLC, it is also possible for one or more of the members to also be a managing member. This arrangement is most common in single-member LLCs, or in small multimember LLCs that only have a few members who can run the business in a manner that is similar to a partnership.
Many states require the LLC to indicate in its filing document whether the company will be manager-managed or member-managed.
Single-member LLCs have the option to be taxed as a sole proprietorship (what the IRS calls “an entity disregarded as separate from its owner"), as an S corporation, or as a C corporation. Multimember LLCs can be taxed as a partnership, as an S corp., or as a C-corp. To choose taxation as a corporation, the LLC must file certain documents with the IRS.
In determining the tax structure for your LLC, it would be wise to seek the advice of a tax professional in order to avoid unexpected tax consequences. For example, some or all of the profits allocated to a member-manager may be considered by the IRS to be earned income, and therefore subject to self-employment tax.
This portion of the site is for informational purposes only. The content is not legal advice. The statements and opinions are the expression of author, not LegalZoom, and have not been evaluated by LegalZoom for accuracy, completeness, or changes in the law.