What is a Multi-Member LLC?
A multi-member LLC is an LLC with two or more owners (members). By default, the IRS taxes it as a partnership. The LLC itself doesn't pay income tax — instead, profits and losses "pass through" to each member's personal return via Schedule K-1.
How It's Taxed
The LLC files Form 1065 (partnership return) annually. Each member receives a Schedule K-1 showing their share of income, deductions, and credits. Members report their K-1 on Schedule E of their personal Form 1040.
Pros
- Liability protection — each member's personal assets are shielded from business liabilities
- Pass-through taxation — no double taxation like a C-Corp
- Flexible profit sharing — members can split profits differently from ownership percentages (with a proper operating agreement)
Cons
- Partnership return required — Form 1065 is more complex than Schedule C and typically requires a tax professional
- Self-employment tax — members who are active in the business owe SE tax on their share of income
- Operating agreement is critical — without one, state default rules govern (which may not match your intentions)
Recommendations
Warning
An operating agreement is essential. It defines how profits are split, how decisions are made, what happens if a member wants to leave, and how disputes are resolved. Without one, your state's default partnership laws apply.
Each member should track their basis in the LLC. Basis determines how much loss you can deduct and whether distributions are taxable.