LLC stands for Limited Liability Company, a business structure that pairs the pass-through taxation of a sole proprietorship or partnership with the limited liability protection of a corporation. LLCs are created under state law and have the power to enter contracts, buy and sell assets, hire employees, take on debt and pay taxes on profits.
The members of an LLC are its owners, so they have a say in how the business is run. They can vote on major decisions and shape the company's direction. An LLC offers a flexible structure in which owners can act much like sole proprietors, partners or passive investors.
Does an LLC always have an owner? Can it have multiple owners?
The short answer is yes. An LLC is an entity with many of the rights and obligations of a person, so it needs an owner who is responsible for its actions. That owner doesn't have to be a human being; it can be a trust, for example, or even another LLC.
The owner is the person or entity that controls the company, and owners may also be referred to as members. An LLC can have one member or many, and each member is an owner because each is entitled to a share of the profits and losses. The articles of organization state how many members are required to form the company, but there is no maximum number of members a business can have.
The number of members should reflect the size and needs of your business and the amount of personal liability you're willing to take on for yourself and your partners. If you're building a large enterprise with many investors and employees, for instance, you might consider forming a corporation instead, since it can provide more protection from lawsuits and debts than an LLC.
Who are the members of an LLC, and who manages it?
The people involved in an LLC generally fall into these roles:
- Members: An LLC can have one member or several. Members can be individuals or other entities, such as corporations, and they govern themselves through an operating agreement. This structure is ideal for small businesses with few managers or employees.
- Managing member: If your LLC has only one member, that person is the managing member. If there are multiple managing members, they must agree unanimously on decisions. The manager runs the LLC's day-to-day operations and serves as the point of contact for legal matters.
- Non-managing members: Non-managing members aren't responsible for the LLC's debts and obligations unless they agree in writing to be liable through a personal liability agreement. They should sign the operating agreement, which sets out how profits and losses are distributed and what rights each owner has to take part in management decisions.
Passive members
Passive members do not take an active part in managing the company, have no voting rights and are not required to attend meetings. They may receive a share of profits in proportion to their ownership percentage, but they aren't obligated to contribute to running the business.
Their role is limited to investing in the business and receiving a share of profits, without any responsibility for managing or growing it.
So, what is the owner of an LLC called?
An LLC is owned by its members, so each member is a part-owner. When a business becomes an LLC, it gains the benefits of the structure while still operating much like a sole proprietorship or partnership. There is no limit on the number of members, and each one enjoys a degree of protection from creditors thanks to the company's limited liability status.
Key takeaways
- An LLC is a business structure that combines the limited liability protection of a corporation with the tax efficiency of a partnership.
- A single-member LLC is treated as a sole proprietorship by default, and the owner must pay self-employment taxes on profits.
- LLCs are run by members or managers. Most states don't require either, but some ask you to designate a manager if you don't want to manage the business yourself.
- Multi-member LLCs are taxed as partnerships. Members don't draw a salary; instead, profits and losses are reported on each member's personal tax return rather than a separate business return.
- Member-managers are members with ongoing authority to make management decisions, and the profits distributed to them are subject to self-employment tax.
FAQs
Is the owner of an LLC called a member or a shareholder?
The owners of an LLC are called members, not shareholders. Shareholders own stock in a corporation, whereas members hold an ownership interest in an LLC.
Can an LLC have just one owner?
Yes. A single-member LLC has one owner and, by default, is taxed as a sole proprietorship, though it still provides the limited liability protection of the LLC structure.
What is the difference between a member and a manager?
A member is an owner of the LLC. A manager runs the company's day-to-day operations. A manager can be a member (a member-manager) or an outside person hired to run the business.