An LLC (limited liability company) is formed under the laws of a specific state. The owner or owners of the LLC are called "members," and these members share membership and also share taxes on income from the LLC. In addition, members can be employees, and the LLC can add new members and remove members. Read more details about these and more questions about LLC members. An LLC is formed by filing Articles of Organization with the state. The LLC is governed by an operating agreement.
Who can be a member of an LLC?
Unless the LLC itself, through its operating agreement, imposes restrictions on members of the LLC, an LLC can be owned by anyone. States do not typically impose restrictions on LLC ownership. LLC members do not have to be a resident of the state, nor even a resident or citizen of the U.S. In addition, legal entities can own LLCs. For example, a corporation, trust, partnership, or other LLC can own an LLC. These situations get pretty complicated, so it's best to consult an attorney in the state before you set up such an LLC.
How are members added to an LLC?
The LLC operating agreement should include provisions for an LLC member to be added. Typically a member is added by consent of a majority of the current LLC members, but any other type of voting is possible.
How are LLC Members Paid?
As a member of an LLC, you are a business owner, not an employee of your company. You don't receive a paycheck. If you need money for personal living expenses, you take what's called a "draw" from the LLC's funds (usually checking account) against your percentage share of investment in that business. The draw is usually in the form of a check, written to you personally from the LLC's business checking account. But this check is NOT a paycheck.
How do LLC members share ownership?
Each member (owner) of an LLC has a share (called a "distributive share") of ownership in that LLC. The percentage of ownership is spelled out in the LLC operating agreement. Profits and losses of the LLC are distributed to the members each year according to their share. For example, if a two-member LLC has a profit of $100,000 for the year and their shares are 60% to Sam and 40% to Kelly, Sam would receive $60,000 and Kelly would receive $40,000. balance sheet and it's the difference between your business assets and your business liabilities.
How do LLC members pay income taxes?
LLC members are taxed on the income from the LLC through their personal tax returns. Single-member LLC members are taxed as sole proprietors, on the net profit calculated on Schedule C. Multiple-member LLC's are taxed as partnerships, with a partnership tax return and Schedule K-1's for each member, showing that member's share of the profits or losses. The K-1 for each member is filed with the member's personal tax return. Read more about how sole proprietors and partnerships pay income taxes.
LLC members are not taxed on the money they draw out for personal use, but only on their share of profits of the LLC for the tax year. If the LLC has a loss, each member may take a share of the loss on their personal tax return.
Self-employment Tax and LLC Members
In addition to income taxes, LLC members are required to pay self-employment taxes (Social Security and Medicare tax) on their share of the income of the LLC. Self-employment taxes are calculated on Schedule SE and the tax is added to the income tax owed on the personal tax return. If the LLC has a loss, no self-employment tax is due for that year.
Can an LLC member also be an employee?
Yes, an LLC member can also be classified as an employee, but the two positions must be completely separate, and there are some legal implications that affect the owner's limited liability, so be sure to check with your attorney before you begin to pay yourself as an employee of your LLC.
If an LLC has "limited liability" can an LLC member still be liable?
Although the LLC structure can protect the LLC members from liability in some circumstances, there are still several ways an LLC member can be liable personally for the LLC:
- If one or more LLC members personally guarantees a business loan for the LLC, those members are liable for repayment of that loan
- If LLC member financial dealings are mixed in with business assets, the LLC can be held not to be separate for liability purposes. This is why LLC's should keep a clear separation between the LLC and the members, through separate checking accounts for business and personal payments, for example.
- If the LLC member engages in fraud or goes beyond the bounds of duties specified in the operating agreement, the LLC member can be held personally liable
- If the LLC members do not conduct the business of the LLC appropriately by keeping good records of LLC meetings and other affairs, the LLC members can be held to have mismanaged the business operations and may incur personal liability.