Business structure
Single-member vs multi-member LLC: what changes with a second owner
A single-member LLC has one owner; a multi-member LLC has two or more. Under state law they are the same kind of company with the same liability protection. The difference is tax: the IRS ignores a single-member LLC for income tax and puts its profit on the owner’s Form 1040, while an LLC with two or more members is a partnership that files its own return, Form 1065, and gives each member a Schedule K-1. In Illinois a multi-member LLC also pays 1.5% replacement tax.
Single-member vs multi-member LLC at a glance
Both are taxed this way by default; either can elect to be taxed as a corporation instead.
| Item | Single-member LLC | Multi-member LLC |
|---|---|---|
| Owners | One | Two or more |
| Default federal tax treatment | Disregarded entity: taxed like a sole proprietorship | Partnership |
| Federal income tax return | None of its own; Schedule C (or E or F) on the owner’s Form 1040 | Form 1065, plus a Schedule K-1 for each member |
| Self-employment tax | On the owner’s net profit | Generally on each working member’s share |
| Illinois return | None of its own; profit goes on the owner’s IL-1040 | IL-1065 |
| Illinois replacement tax | None | 1.5% of net income |
| Operating agreement | Recommended | Essential: sets each member’s share, votes and exit terms |
| Can elect S corp status | Yes | Yes |
How a single-member LLC is taxed
For income tax the IRS treats a single-member LLC as part of its owner, a “disregarded entity.” An individual owner reports the business on Schedule C (or Schedule E for rentals, Schedule F for farming) and pays self-employment tax on the profit the same way a sole proprietor does.
It is still a separate entity for employment and certain excise taxes, so an LLC with employees needs its own EIN and files payroll returns in the LLC’s name. On a Form W-9 for income, though, it gives the owner’s Social Security number or EIN.
How a multi-member LLC is taxed
An LLC with two or more members is a partnership unless it elects otherwise. The LLC files Form 1065 each year, due March 15 for a calendar-year business, and gives each member a Schedule K-1 showing their share of the profit, which they report on their own returns whether or not the money was paid out.
Members who work in the business generally pay self-employment tax on their share. In Illinois the LLC also files Form IL-1065 and pays the 1.5% personal property replacement tax on its net income, a cost a single-member LLC does not have.
LLCs owned by a married couple
An LLC owned by two spouses is a multi-member LLC, and the IRS says a business run through an LLC does not qualify for the qualified joint venture election that lets spouses file as two sole proprietors. Couples in community property states can, under Rev. Proc. 2002-69, choose to treat a spouse-owned LLC as a single-member LLC; Illinois is not a community property state, so an Illinois couple’s LLC is a partnership.
Adding or removing a member
A change in the number of owners changes how the LLC is taxed from that point:
- Adding a second member turns a single-member LLC into a partnership for tax purposes, with a Form 1065 for the year and K-1s for the members.
- Going down to one member makes it a disregarded entity again, unless it has elected to be taxed as a corporation.
- Update the operating agreement first, and tell the state if your articles list the members or managers.
Which one should you choose?
You rarely choose: the number of owners decides it. If you are the only owner, a single-member LLC is simpler and cheaper to keep, with no separate return. Bringing in a partner, investor or spouse makes it a multi-member LLC, and the extra cost is mostly the partnership return and, in Illinois, the replacement tax. Once profit is well above a reasonable salary, either kind may save tax by electing S corporation status.
Forming an LLC with a partner?
We form single- and multi-member LLCs in all 50 states, draft the operating agreement and get the EIN, starting at $250 plus the state fee, and prepare Form 1065 and the K-1s each year.
Questions people ask
What is the difference between a single-member and a multi-member LLC?
The number of owners, which decides how the IRS taxes it. A single-member LLC is reported on the owner’s Form 1040; a multi-member LLC is a partnership that files Form 1065 and issues K-1s.
Does a multi-member LLC pay taxes?
Federally, no: it files Form 1065 but the members pay tax on their shares. In Illinois it does pay the 1.5% replacement tax on its net income.
Can a husband and wife have a single-member LLC?
Not in Illinois. An LLC owned by both spouses is a multi-member LLC taxed as a partnership. Only couples in community property states can choose single-member treatment.
Does a single-member LLC file a separate tax return?
Not for income tax. The profit goes on the owner’s Form 1040, usually on Schedule C. It does file payroll returns in its own name if it has employees.
Can a multi-member LLC be an S corp?
Yes, if every member is an eligible shareholder, which rules out nonresident aliens, partnerships and corporations. It files Form 2553 signed by all members.
Where these rules come from
- IRS: Limited liability company (LLC)
- IRS: Single member limited liability companies
- IRS: Election for married couples unincorporated businesses
- Illinois Department of Revenue: tax rates
General information, current when written, not advice about your situation. Fees and forms change; the official pages above are the authority.
