Can Two People Own an LLC? How the Process Works

Yes, two or more people can own a Limited Liability Company (LLC). This business structure is known as a multi-member LLC and is a popular choice for partners who want to combine their resources. It provides the personal liability protection of a corporation, meaning personal assets are shielded from business debts, with the operational flexibility of a partnership. This arrangement allows individuals, other corporations, and even foreign entities to join as co-owners, who are referred to as “members.”

Understanding the Multi-Member LLC Structure

The fundamental choice for co-owners is between two management structures: member-managed or manager-managed. In a member-managed system, all owners have the authority to participate in the daily operations and decision-making of the company. This is the most common approach, especially for smaller businesses where all partners are actively involved, and it is often the default structure if not otherwise specified in formation documents.

Conversely, a manager-managed structure delegates authority for day-to-day operations to a designated manager or a group of managers. These managers can be members of the LLC or outside individuals hired for their expertise. This model is often preferred when some members wish to be passive investors or in larger, more complex organizations.

Creating the LLC Operating Agreement

While not every state mandates it, an operating agreement is a foundational document for a multi-member LLC. This internal contract guides how the business will function, defining the relationship between co-owners and establishing procedures to resolve disputes. Without this agreement, the company is governed by the state’s default LLC rules, which may not align with the members’ intentions.

A component of the agreement is the section on ownership percentages and capital contributions. This part specifies what each member invests—which can be cash, property, or services—and the corresponding ownership stake they receive. It clarifies the initial value of these contributions and sets the foundation for how profits and losses are allocated.

The agreement must also detail how profits and losses will be distributed. Members can decide to allocate these based on ownership percentage or agree to a different arrangement. This flexibility allows for special allocations, perhaps giving a larger share of profits to a member who contributed a unique skill.

Defining roles, responsibilities, and voting rights is another function of the operating agreement. It should outline the duties of each member and establish the process for making major business decisions. For instance, the agreement can require a majority vote for routine choices but demand unanimous consent for significant actions like taking on substantial debt.

Finally, the operating agreement should contain buy-sell provisions. These clauses are a roadmap for what happens if a member dies, becomes disabled, or wants to exit the business. The provisions establish a method for valuing a departing member’s interest and the terms for the remaining members to purchase that share.

Tax Considerations for Co-Owners

For federal tax purposes, the Internal Revenue Service (IRS) automatically treats a multi-member LLC as a partnership. This means the LLC itself does not pay income taxes directly; it is a “pass-through” entity. The business is required to file Form 1065, which reports the company’s income and losses to the IRS. Following this, the LLC provides each owner with a Schedule K-1, which breaks down their individual share of the profits and losses. Members use this information to report income on their personal tax returns and pay necessary taxes, including self-employment taxes.

An LLC offers flexibility in its tax treatment, and co-owners can elect to have their business taxed differently. By filing Form 8832, the LLC can choose to be taxed as a C corporation. Under this structure, the company pays corporate income tax on its profits, and owners pay taxes again on any dividends they receive.

Alternatively, if it meets certain criteria, the LLC can file Form 2553 to be taxed as an S corporation. This election maintains the pass-through nature of taxation but can offer savings on self-employment taxes. In an S corp, owners who work in the business must be paid a “reasonable salary,” which is subject to FICA taxes, but any additional profits can be distributed as dividends that are not subject to self-employment tax.

The Formation Process

Officially forming a multi-member LLC involves filing a document called the Articles of Organization with the state’s business filing agency, typically the Secretary of State. This form requires the LLC’s chosen name, which must comply with state rules like including a designation such as “LLC” or “Limited Liability Company.” The Articles of Organization also require the address of the LLC’s principal place of business and the name and address of its registered agent.

The registered agent is a designated individual or company responsible for receiving official legal and state correspondence on behalf of the business. Depending on the state and the chosen management structure, the names of the members or managers may also need to be listed.

These formation documents can be found on the website of the state’s filing agency and submitted online or by mail. There is a required filing fee that varies by state, ranging from around $50 to several hundred dollars. Once the state approves the filing, it will issue a certificate of formation, officially establishing the LLC.