Members of a multi-member LLC will benefit from the limited liability associated with an LLC as well as the benefit of a single level of tax and the flow-through of business losses.
For tax purposes, a multiple-member LLC is treated as a partnership and is required to file a U.S. partnership tax return (Form 1065). If an LLC is characterized as a partnership for federal income tax purposes, the LLC’s earnings would not be subject to an entity-level tax; instead, they would “flow-through” to the members. Thus, earnings are taxed only once. In addition, LLC losses would “flow through” to the members and the members could deduct their ratable share of the losses generated.
It is possible for a multiple-member LLC to elect to be taxed in the same manner as a “C” corporation (double taxation), but this is generally not advisable, as this election will last for a minimum of five (5) years and as there may be tax consequences for switching back to pass-through taxation.
Once you have formed your multiple-member LLC, it is very important that you get a LLC Operating Agreement for your LLC. The LLC Operating Agreement is the core document that is referred to when issues concerning the LLC need to be resolved. The LLC Operating Agreement is the most important document for your LLC.