Can LLCs have employees?

Employment Rate in the United States hit a record low of 51.30 percent in April of 2020. With unemployment on the rise, starting a company and hiring individuals will be hugely beneficial to the economy. One of the best ways to get a business up off the ground is to set up an LLC.

 

A limited liability company (LLC) is a great way to organize your business, as it provides members with protection. These business entities are not subject to double taxation as is the case with corporations. However, you may have questions about whether you can hire employees for your LLC. 

 

When answering the question, the simple answer is yes, an LLC can have an unlimited number of employees. Whether your LLC is managed by its members or by managers, and regardless of the number of members that comprise it, it can still have employees. However, there are some important distinctions to be made when it comes to LLCs and their employees.

What is an employee?

The legal definition of an employee is any person that is hired to perform work for an employer, in exchange for a salary fee, or payment. It is important to understand that employees are not the same as independent contractors. Employees work directly for the company, while independent contractors do not. This difference is significant when it comes to determining whether specific laws apply to the business.

It can also matter when it comes to determining whether an individual is allowed to receive worker’s compensation or whether the LLC must take responsibility for any damages caused by an individual. The way the law usually works is that members cannot be held personally liable for any damages caused by an employee, but the LLC itself can be held liable. If an employee’s actions lead to company liabilities, the liability protection will cover members, but not employees.

To hire employees you need an EIN

An LLC must have an Employment Identification number, this can be obtained from the IRS, in order to hire employees. The EIN is used to report taxes and other documentation, including opening a business bank account and creating payroll for employees. In some states, you must register as an employer on top of registering as a member of the  LLC. This employer classification is usually used for taxation purposes, however, it may also apply to certain annual filing requirements or statutory compliance reports.

All employees must have a Social Security Number

Before hiring an employee, you need to be certain that the individual is allowed to legally work in the United States. One way to check this is to make sure the employee has a Social Security Number. A person needs this number before they can set up the collection and payment of the appropriate taxes. Newly hired or rehired employees must be reported by the business to its state of residence within 20 days.

LLC members are not employees by default

Employees do not need to be members of the LLC, however, members can choose to be employees. In general, LLC members are not employees of the LLC. If you’re a member, you are compensated by receiving a share of the profits of the company, not through a salary. You also have the ownership rights to the business and, as the company increases in value, the value of your ownership increases. Employees on the other hand will just receive a monthly salary.

 

Although the IRS considers LLC members to be self-employed, LLC employees are not. Just like other business entities that directly hire employees, the IRS requires LLCs to file returns and pay payroll tax.

 

LLC’s can have an unlimited amount of employees, but for the safety of your company you must make sure you are aware of the distinction between those who work for you, and that all members are legal in the USA.

 

Alex Hamilton