Fact checked for accuracy by Billie Anne Grigg, a bookkeeper and Mastery Level Certified Profit First Professional.
Understanding the role of a member when considering an LLC as your business structure is vital.
Various responsibilities and roles exist depending on how many members you work with inside the business.
If you’re operating a single-member LLC, then you’ve taken on all responsibility for the success of the business.
Running a multi-member LLC with other members requires the ability to work together as you list out which responsibilities each member agrees to fulfill.
You might feel confused trying to figure out what a member does in an LLC.
There’s no need to fear, however. In this article, you’ll find out that an LLC’s inner workings aren’t as complicated as you might think it is.
You’ll learn everything you need to know about LLC members, such as basic definitions, how the various roles work, taxation issues, and how to add members into your company structure.
Put simply, an LLC member is an owner of the company. You can have one owner (member) of your business, or you can have multiple owners.
You’re probably familiar with corporations calling their owners stockholders or shareholders. Corporations use those terms because they issue stock or share certificates.
Limited liability companies aren’t required to issue anything like a stock certificate. Instead, LLC owners own membership interests in the business.
An LLC member can take on a passive or active role.
An example of a passive LLC member is a person or business that provides investment into your LLC. They might inject cash capital or equipment capital to help get the business off the ground. This type of member wants an ownership stake but doesn’t have any interest in helping with the company’s daily operations.
An active LLC member helps operate the day-to-day business activities. This owner might also provide capital for the business. Since they also have the skills or desire to stay active in the company, then they take on that extra role that passive members don’t do.
Active members are also called managing members because they’re managing the LLC’s operations. An example of a managing member is a secretary, president, or office manager who also maintains an ownership stake in the LLC.
You’ll typically form an operating agreement when starting an LLC. This internal company document lists the roles, responsibilities, and ownership stake for all members. Active members will more than likely share a larger piece of the LLC’s profits than passive members.
Most states impose few restrictions on who can act as a member of an LLC. Typically, members must be at least 18 years old. U.S. citizenship isn’t required to act as an LLC member. Entities can also act as a member such as:
In these cases, the members, shareholders, or trustees act on behalf of LLCs, corporations, or trusts to perform the LLC’s member duties.
Only a few states require you to list out the members of your LLC when filing the Articles of Organization. Instead of adding members to that document, you should use the operating agreement for that purpose.
Whether you will form a single-member LLC or multi-member LLC depends on the number of members in your LLC.
You’ll file a single-member LLC if you’re the sole owner of the business. LLCs with more than one owner form a multi-member LLC.
A single-member LLC is a relatively simple concept. You would use this type of LLC when you’re the only member and looking for the limited liability benefit afforded by the LLC structure.
Acting as a sole proprietorship might keep your business simple, and it’s quite easy at tax time to file your return. Unfortunately, your personal assets are fully exposed if your business activities cause a lawsuit, or you have trouble paying back a business loan.
If you’re structured as a single-member LLC, operate the business ethically, and keep the business finances separate from your personal finances, then your personal assets remain safe if the business gets in trouble with a lawsuit or default loan situation.
A multi-member LLC receives the same limited liability benefit for its two or more members. Other key considerations come into view that you wouldn’t need to think about with a single-member LLC.
For example, operating as a single-member LLC means that the sole owner must take on all member and manager roles. In a multi-member LLC, the members can split member and manager tasks and responsibilities between one another.
Decision-making is straightforward inside a single-member LLC. You make all decisions easily as the only owner. This process becomes more complicated inside a multi-member LLC because disagreements might arise between the various members about the best way to make day-to-day and long-term decisions.
Your operating agreement lays out each LLC member’s responsibilities, rights, and duties. Make sure the agreement clearly defines which members have sole authority over which areas of the business. You also need to make it clear how group approval will work when making specific types of decisions.
Examples of responsibilities that managing members might have include:
- Day-to-day decision-making and management duties
- Authority to enter into contracts and other binding agreements, such as real estate purchases or supplier contracts
- Human resources decisions such as hiring and training employees
Non-managing members won’t participate in these types of daily activities. Instead, they may have provided capital to help the business get started or stay in operation.
Single-member LLCs get treated like sole proprietorships when filing and paying LLC taxes. Your LLC entity itself won’t file a return or pay taxes to the IRS. Instead, you must file your individual 1040 and attach what’s called a Schedule C to Form 1040. You’ll report any business income or loss on Schedule C.
If you’re operating your business as a multi-member LLC, then the LLC gets treated as a partnership at tax time. Similar to the single-member LLC, the limited liability company itself doesn’t pay taxes on business profits. Instead, the LLC profit or loss gets passed through to each LLC member’s individual tax return. In this case, you’ll use Schedule E.
Inside the LLC operating agreement, you must set out each LLC member’s stake in the company. This then allows each member to take their proper share of last year’s profits and pass the correct number down onto their individual tax return.
For example, if you have four LLC members in a multi-member LLC, then it might break down this way:
- Member One owns a 25% stake
- Member Two owns a 25% stake
- Member Three owns a 40% stake
- Member Four owns a 10% stake
If the LLC enjoyed profits of $500,000, then each member passes their share of the profits like this onto their individual tax returns:
- Members One and Two reports $125,000 each
- Member Three reports $200,000
- Member Four reports $50,000
Follow these steps to add new members to your LLC. For a full breakdown of all these steps, head over to our guide on how to add members to your LLC.
If you created an operating agreement when starting the LLC, then it will outline the procedure for adding a member. If an operating agreement is absent, most states simply require the current members to add the new member after agreeing to do so.
Each LLC member must have a capital account on record that states their service, property, or financial contribution to the business. It doesn’t need to match equally the amount a member invests in the company. However, you do need to settle on and record the terms of the ownership stake.
Current LLC members should vote on the operating agreement amendment that states the new member’s ownership stake, financial contribution, responsibilities, and how they will absorb the company’s profits and losses. Each member dates and signs off on the amendment.
Each state has its own rules when it comes to the procedure for updating your LLC’s Articles of Organization after a member addition. Get this change completed and file it with the secretary of state.
If you’re adding one or more partners to a single-member LLC, then you represent the unanimous vote, which makes the decision an easy one.
Check with your state law when conducting this type of LLC conversion. Some states require that the single-member LLC dissolves first. Then, you reform as a multi-member LLC.
Your tax situation changes in this case because the multi-member LLC becomes a “flow-through” entity, where the IRS treats it as a partnership for tax purposes. You and the new member need to file Form 8832 with the IRS to notify them of this tax classification change.
You may wonder how an LLC member is different from an organizer or manager.
The LLC’s organizer is the person who files the Articles of Organization when starting the LLC. You can choose from the following people or entities to become your LLC organizer:
- Online business services provider
- Your registered agent
- You or another member of the LLC
Most states simply require that the organizer is 18 or older. This person or entity files the formation paperwork for your limited liability with the state.
If you feel comfortable filing the Articles of Organization, then you can do it. Hire an online business services provider, accountant, or lawyer if you’re not sure about the procedure and don’t want to risk a filing mistake.
An LLC manager is a person or entity involved with the day-to-day operations of your company. If you’re running a single-member LLC, then you would operate a member-managed LLC. This means you serve both roles of member and manager. You own the company, and you manage the company daily.
Multi-member LLCs have several options when it comes to the role of manager. One or more of the LLC’s members can also serve as managers. Or, your multi-member LLC can decide to hire an outside person or entity to serve in the management role.
The Last Word
You should now have a better understanding of the member’s role inside the structure of an LLC, as well as how it relates to the manager’s role. If you’re ready to choose an LLC as your business entity, then the first step is to become the LLC organizer (or hire an organizer) and file the Articles of Organization with your secretary of state. There are a lot of services out there that can help you get started, so head over to our top picks for the best LLC service for recommendations.
Filed under: Advice Columns