Food for thought for the would-be entrepreneur (part 6 in a series)
So it’s not just you, but you and your buddy? Or you and your 14 cousins? No problem! You can also form your business venture as an LLC.
What’s the same? The filing process is much the same. The banking requirements are definitely the same. The need to keep your personal and business bank and credit card activity separate continues to be the same. You must get a federal ID number. My recommendation for insurance persists, too.
What’s different? With multiple members, you are no longer treated as a disregarded entity for tax purposes. Instead, for income tax purposes, the entity’s activities are reported on Form 1065. (Most states also have a stand-alone form for multi-member LLC’s that file Form 1065 for federal purposes.) Form 1065 is the federal form for partnerships. Most multi-member LLCs are de facto partnerships, and they follow their state’s partnership tax rules.
Another big difference is that you really should visit a lawyer to draw up a partnership agreement between all of you. You may be BFFs today, but the demands of business have a way of shoving wedges between even the closest of friends. A partnership agreement will address each person’s responsibilities, the way money goes into the venture, the way money comes out of the venture, and what to do if things go south. Do not get this from your uncle, the real estate attorney! Spend the time and money to visit an experienced business attorney who will ask you plenty of hard questions. Be prepared!
With a multi-member LLC, it is very important that you track money, especially money between the partners/members and the LLC. This includes the money each person contributes and the money each person takes out, as well as each person’s share of annual profits/losses.
Finally, like the sole member LLC, the people in a multi-member LLC are still called “members.”
As for taxes…we’ll address that in its own article.