My friend and I want to form an LLC. Should be both be members/owners, or should one of us be the owner and just pass on 50% of the money to the owner?
Some things to consider as to how you decide are:
If your LLC has more than one member, it must obtain its own IRS Employer Identification Number (EIN). If you form a single member LLC, you could use the social security of the owner (however, we don’t recommend using a social security number for a business).
If both of you are members/owners of the LLC, then if one decides to leave the business, the LLC will be most likely dissolved. (A new LLC can be formed.) If the LLC is under one member/owner, if the other individual leaves, then the LLC will stay intact and the member/owner can contract with someone else.
If the LLC has one owner and gives 50% of the profits to the other individual, there is a chance that the IRS could consider the other individual as an employee and not an independent contractor thereby requiring that the LLC pay the individual through payroll (and force the LLC to pay unemployment taxes, etc.) In addition, if the IRS considers the individual to be an employee, the LLC could be assessed back taxes, penalties, and interest. If both of you are set up as members/owners of the LLC, then there is no concern about employees v contractors.
If there is a single member/owner of the LLC, then it’s simple since the IRS will treat the LLC as a sole proprietorship and as such the LLC itself does not pay taxes. All profits and losses of the LLC would be reported on the member/owner personal income tax return on (Schedule C) and file it with his/her 1040 tax return.
If the LLC has multiple members/owners, the IRS will treat the LLC as a partnership. This could be more expensive for tax preparation. The LLC wouldn’t pay taxes, but each member/owner would be taxed on their share of the profits via their personal tax returns (attaching Schedule E). The LLC would need to file Form 1065 (as all partnerships do) with the IRS. The LLC would give each member/owner a Schedule K-1, showing each member’s/owner’s share of LLC income, credits and deductions.