The Difference Between Multi-Member and Single-Member LLCs in Arizona

Whether you choose a multiple-member or single-member LLC, you’ll have to consider more than just the number of people it involves. Due to the benefits and drawbacks of each classification, a single person may choose to create a multiple-member business, while multiple people may choose to opt for single-member companies. 

When it comes to multiple-member companies, you will need to carefully spell out everyone’s rights in case of an irreconcilable disagreement, death, or split-up. Single-member LLCs are simpler for taxes because they don’t require a federal tax return unless you opt for the business to be treated like a corporation. In this case, income will be reported on the individual’s income tax return. 

Multiple-member LLCs will not only file a tax return but also give each member a K-1 form to submit with their tax forms. In some cases, hiring an attorney is imperative for making sure your business is lawfully run.

What to Consider With Multi-Member LLCs in Arizona

  • Whether you should choose a single or multi-member LLC doesn’t only depend on the number of members involved
  • An operating agreement is good to have, regardless of whether you choose a single or multi-member LLC
  • Ownership, management, and tax considerations may all differ depending on which you choose
  • Working with an attorney in the process of forming an LLC will help protect you against unforeseen difficulties

The main difference between multi-member and single-member LLCs is obvious, but there are important nuances to think about before selecting one of these options. You’ll want to consider personal asset protection, ownership and management, compliance, formation, and more. The entity type selected will affect many crucial aspects of the business, so this isn’t a decision you should take lightly. 

Operating Agreements

Whether you choose a multi-member, single-member, multi-member managed or manager-managed LLC, you should make an operating agreement for the business. While operating agreements are not required by state law in Arizona, it will help ensure you are on the same page as the other owners when it comes to each person’s responsibilities, roles, and more. It also helps lay out a plan for how to handle future disagreements, dissolution of the company, and other concerns. 

LLC Ownership

Every state allows eligible individuals to form an LLC business structure, which is its own legal entity. Single-member LLCs will have a single member/owner who controls the company entirely. Multi-member LLCs have at least two members/owners who share control over the business. 

You may choose an unlimited number of owners in this type of LLC, unless you choose S corporation tax treatment (in which case it must be 100 or fewer). You might choose a multi-member LLC even if you’re a single business owner, if you want to make a relative a member, for instance.

LLC Management

Single-member LLCs have a single member who is also the manager. Multi-member LLC owners, on the other hand, must choose between having a manager-managed or member-managed business. In a member-managed arrangement, all of the owners are involved in the company’s work. This requires majority approval for securing loans, entering contracts, and other important business decisions.

For manager-managed LLCs, members choose a manager (from the LLC members or a third-party), who will have the authority to oversee daily operations and company decisions. Other, non-manager members may make strategic, high-level decisions or act as passive owners.

LLCs and Personal Asset Protection

Both multi-member and single-member LLCs protect the personal assets of the owner. Since the LLC is its own legal entity separate from the members, the owners’ personal property is protected in case of liabilities. If, for example, the business can’t cover its debts or someone sues the LLC, the members’ own property (like their car, bank accounts, and other assets) won’t be subjected to collections. However, if a member has done something illegal or committed fraud, this may change.

How Working With an Attorney Can Help

LLCs are flexible, simple, and allow you to manage your company on your own or with partners. If you have more questions on which entity to select, hiring an attorney can be helpful during the process. They will help you go over your options in detail, so you can make an informed decision. A business attorney can help you with filing documents, drafting contracts, and answering your tax questions.

Frequently Asked Questions on LLCs in Arizona

Here are some common questions related to LLCs in Arizona: 

Q: What do I need to keep in mind about sales tax?

If you’re selling goods through your LLC in Arizona, you must collect and pay sales tax to the state. You’ll need to register with the Department of Revenue online or by mail. Once you’ve signed up, you will receive a sales tax license and must send the DOR regular sales tax returns.

Q: What do I need to know if I plan to do business in other states?

If you plan to do business in multiple states, you might have to also register your LLC in those locations. Whether you must register in the states you do business in depends on the state laws involved. Often, hiring employees in another state or soliciting business in that location will count as doing business and require that you register. Registration usually requires that you obtain the necessary certificate to do business legally.

Q: What are some of the drawbacks involved in choosing a multi-member LLC?

As with any important business decision, you should think about the disadvantages of choosing a multi-member LLC, especially concerning taxes. For example, multi-member LLC requires that you file a partnership return come tax season, which comes with difficult rules. Rather than the single member filing a return, they will report the business income using their personal tax return.

What to Do if You Need Help With a Multi-Member LLC in Arizona

Starting a small business can be intimidating if it’s your first time. Whether you need help drafting a contract, choosing a tax classification, or making sure you’re following state laws, contacting a business attorney is advisable. 

Call JacksonWhite’s Small Business Law Team at (480) 464-1111 to discuss your case today.

Contact Small Business Representation Attorney Dave Weed

Call (480) 464-1111 or fill out our contact form to schedule your consultation today.