Can LLCs Have Employees? Yes – Here’s What Many Owners Get Wrong

Lana Dolyna, EA, CTC

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Confused about whether LLCs can have employees? You’re not alone. According to a 2023 National Small Business Association survey, over 40% of new LLC owners misclassify workers, risking IRS penalties and lawsuits.

That means nearly half of fresh LLC entrepreneurs are making potentially costly mistakes in how they categorize their workers. Clearly, confusion abounds on this topic.

The good news is yes – a Limited Liability Company (LLC) can have employees. However, there are important nuances and rules to understand. This comprehensive guide will demystify everything about LLCs and employees.

We’ll answer the core question directly, define key terms (like what an “LLC member” really means), walk through real-world examples for single-member, multi-member, and professional LLCs, present evidence and comparisons to other business structures, and highlight common pitfalls to avoid.

By the end, you’ll know not just whether an LLC can hire employees, but how to do it correctly without falling into the traps that many owners do.

Yes, LLCs Can Have Employees – Here’s How and Why

Short answer: Yes, an LLC can hire employees just like any other business entity can. There is no law barring an LLC from having one or many employees. In fact, thousands of LLCs across the U.S. have employees on payroll. Whether you run a single-member LLC or a multi-member LLC, or even a professional LLC (PLLC) for licensed professionals, you are allowed to employ staff to help run your business.

That said, it’s important to understand how this works and why confusion exists. Here are the key points to know upfront:

LLCs can hire employees: An LLC is a legal business entity separate from its owners. This means an LLC can enter contracts and hire people in the company’s name. It can employ full-time or part-time workers, pay wages, and offer benefits—just like a corporation or any other employer would. There’s nothing inherent in the LLC structure that prohibits having employees.
All types of LLCs qualify: Single-member LLCs, multi-member LLCs, and professional LLCs all can have employees. A single-member LLC (one owner) can hire staff beyond the owner. A multi-member LLC (multiple owners) can also hire employees. And a professional LLC (formed by certain licensed professionals) can employ support staff. The structure or number of members doesn’t limit an LLC’s ability to have W-2 employees on payroll.
Owners are not automatically employees: One area of confusion is the role of the LLC’s owners (called members). By default, LLC members are not considered employees of the LLC. The owner of a single-member LLC, for example, usually takes profits as personal income (a draw or distribution), not a paycheck with a W-2. This doesn’t mean the LLC can’t have employees at all—it can hire other people—but the owner themselves typically isn’t on payroll in the way an outside employee would be. (There is an exception if the LLC elects to be taxed as a corporation, which we’ll touch on later.)
Same employer obligations apply: If your LLC does hire employees, it must follow all the same laws and obligations any employer must. This includes obtaining an Employer Identification Number (EIN) from the IRS, setting up state and federal payroll tax accounts, withholding income and payroll taxes from employee paychecks, paying the employer’s share of Social Security/Medicare taxes, providing required benefits or insurance (like workers’ compensation), and complying with labor laws. In other words, having an LLC doesn’t exempt you from any standard employer responsibilities.

In summary, an LLC can absolutely have employees. The LLC simply steps into the role of “employer,” taking on legal responsibility for anyone it hires. The reason many new owners get it wrong isn’t because LLCs can’t have employees (they can), but because of misunderstandings about who is an employee (e.g. owner vs. staff) and how to properly handle things like taxes and classifications. The rest of this article will clarify those details so you can confidently employ workers through your LLC.

LLC Employment: Key Terms You Need to Know

Before diving deeper, let’s clarify some key terms and definitions related to LLCs and employment. Understanding these will help make sense of the examples and rules later on:

Limited Liability Company (LLC): A business structure organized under state law that is legally separate from its owners. It provides personal liability protection to its owners (members) and offers flexibility in management and taxation. An LLC can enter contracts, own assets, sue and be sued, and yes, hire employees in the name of the company.
Member: An owner of an LLC. LLC owners are called members rather than shareholders or partners (though a multi-member LLC is taxed similarly to a partnership by default). A member can be an individual or even another company. Members are generally not considered employees of the LLC simply by virtue of ownership. Instead, they earn money from the LLC through profit distributions (and possibly guaranteed payments in a partnership-style LLC), not through wages.
Manager: (If applicable) The person or entity designated to manage the LLC’s operations. Some LLCs are member-managed (the owners run the day-to-day business) and others are manager-managed (they appoint a manager). A manager could be an employee if they draw a salary and are not an owner, or it could be a member-manager who is an owner handling operations (owners acting as managers are still not employees by default if they are members).
Employee: A person who works for the LLC under an employer-employee relationship. The LLC controls how, when, and where the person’s work is done, and the worker is paid a wage or salary. Employees appear on the company’s payroll, are given a W-2 form each year for taxes, and the LLC must withhold income tax and FICA (Social Security and Medicare) from their pay. Any LLC can hire employees (whether it’s the owner’s cousin or an unrelated new hire) as long as they follow the proper hiring and payroll process.
Independent Contractor: A person or business hired to perform services for the LLC but not as an employee. Contractors are self-employed and typically control how they deliver their services. They are paid via invoices and receive a 1099 form (not a W-2) if paid over a certain amount in the year. The LLC does not withhold payroll taxes for contractors. Misclassification warning: If an LLC treats someone as an “independent contractor” when the LLC actually directs and controls their work like an employer, the IRS and Department of Labor may deem that person an employee. Misclassifying employees as contractors (whether accidentally or to avoid taxes) is one of the biggest mistakes (and this is exactly what over 40% of new LLC owners are doing wrong, per the NSBA survey mentioned earlier). Always classify workers correctly.
Single-Member LLC: An LLC with one owner. For tax purposes, unless it chooses otherwise, a single-member LLC is a “disregarded entity,” meaning it’s taxed as if it were a sole proprietorship (the IRS ignores the LLC as separate from the owner for income tax filing). Important: Even though it’s “disregarded” for taxes, it’s still a separate legal entity. A single-member LLC can hire employees (other than the sole owner). If it does, it will need its own EIN and will file payroll taxes under the LLC’s name.
Multi-Member LLC: An LLC with multiple owners. By default, the IRS taxes it like a partnership (each member gets a share of profits/losses on their personal tax return). A multi-member LLC can also hire employees to work for the company. The LLC, not the individual members, is the employer. Members split the profits of the business but generally do not receive salaries as employees (again, unless a special tax election is made).
Professional LLC (PLLC): A special type of LLC for licensed professionals (such as doctors, lawyers, architects, accountants) required in some states. The main difference is that only licensed individuals in the specific profession can be owners (members) of a PLLC. Can a PLLC have employees? Yes. A PLLC may hire non-owner employees to support the business (e.g., nurses or administrative assistants in a medical PLLC, paralegals or receptionists in a law firm PLLC). Those employees don’t need to hold professional licenses for the core service, as long as they aren’t actually performing the licensed professional work. The PLLC still must follow all employment laws for its staff. (Note: The licensed professionals who own the PLLC might also be personally liable for their own malpractice or professional errors, but that’s separate from general employment.)
Employer Identification Number (EIN): A federal tax ID number (nine digits) assigned by the IRS to businesses. Any LLC that has employees must obtain an EIN. The EIN is used when filing payroll tax forms (like quarterly tax returns and W-2s) and when remitting federal payroll taxes. Even single-member LLCs that had no EIN initially (because the owner was reporting taxes under their Social Security Number) will need to get an EIN as soon as they decide to hire an employee. States also often require registration of the EIN with state labor or revenue departments for withholding and unemployment taxes.
Payroll Taxes: Taxes related to employing workers. For each employee, an LLC must withhold income tax (federal and state) from their pay, as well as the employee’s share of Social Security and Medicare taxes (FICA). The LLC also pays the employer’s half of Social Security/Medicare, plus federal and state unemployment taxes. These combined obligations are referred to as payroll taxes and must be deposited on a regular schedule and reported (for example, via IRS Form 941 quarterly). Failure to properly handle payroll taxes is a serious pitfall (the IRS can levy penalties or even hold owners personally responsible in extreme cases).
W-2 and 1099 Forms: Tax forms for different worker types. A W-2 is the annual wage statement an employer (like an LLC) must give each employee, showing the wages paid and taxes withheld. A 1099-NEC (formerly 1099-MISC for non-employees) is given to independent contractors to report payments made to them (if $600 or more in a year). If your LLC has employees, you will issue W-2s to them. If you pay independent contractors, you may need to issue 1099s. This distinction again highlights the difference between an employee and a contractor.

Understanding these terms lays the groundwork. Now, with this terminology in mind, let’s look at some concrete examples of how various LLCs go about hiring employees in practice.

LLCs Hiring Employees: Three Scenarios in Action

One of the best ways to understand how LLCs handle employees is to look at common scenarios. Below are three detailed examples covering a single-member LLC, a multi-member LLC, and a professional LLC, each hiring employees. These scenarios will illustrate the process and considerations in each case. We’ll also include a table for each scenario to summarize the key points of the employment setup.

Scenario 1: Single-Member LLC Hiring Its First Employee

Example: Jane is the sole owner of Jane’s Coding Consulting, LLC, a single-member LLC. For a year, Jane has run the business alone, doing all the coding and administrative work herself. Her business is growing, and she decides to hire an assistant developer as an employee to help with projects.

Jane, as a single-member LLC owner, is not on payroll herself – she simply takes the LLC’s profit as her income on her personal tax return. But when she brings on a new developer as an employee, her LLC becomes an employer. Here’s how Jane handles it:

Getting an EIN: Jane’s LLC didn’t need an EIN when it was just her (she reported taxes under her own SSN). But now that she’s hiring an employee, she applies for an EIN from the IRS. This EIN will be used for all employment tax filings.
Setting up payroll: Jane decides on a salary for the new hire. She uses a payroll service to help calculate the withholdings. Each pay period, Jane’s LLC withholds federal and state income taxes from the employee’s paycheck, plus Social Security and Medicare contributions. The LLC matches the Social Security/Medicare (as required by law) and pays federal/state unemployment taxes on the wages.
Compliance: Jane has the new hire fill out a W-4 (tax withholding form) and I-9 (employment eligibility verification). She also ensures she’s following her state’s labor laws (minimum wage, etc.). Because she’s in a state that requires even one employee to have workers’ compensation insurance, she secures a policy.

At year-end, Jane’s LLC will issue a W-2 to the employee and file W-2 copies and payroll tax forms with the IRS and state. Throughout this, Jane remains the owner, not an employee. She does not pay herself a W-2 wage. Instead, if the business profits, she’ll take a distribution or draw separately.

Summary of Single-Member LLC hiring an employee:

Aspect	Details
LLC Type	Single-Member LLC (one owner)
Owner	1 individual (sole owner, Jane)
Employees Hired	Yes – hired 1 employee (assistant developer)
Owner on Payroll?	No. Owner is not an employee; Jane takes profits as personal income (draws).
Tax Classification	Disregarded entity (taxed as sole proprietorship by default).
Employer Setup	Obtained EIN; set up payroll system for employee wages.
Key Requirements	Withhold/pay payroll taxes, follow labor laws, get workers’ comp insurance (as applicable).
Considerations	Owner cannot be paid as an employee unless LLC elects S-Corp status. Must correctly classify any worker (employee vs contractor).

In Jane’s scenario, the LLC successfully has an employee. The process involved some paperwork and compliance, but legally it’s straightforward since the LLC is recognized as the employer. Jane’s role changed from doing all the work herself to being an employer managing someone else – but her legal status remained an owner, not an employee of her own LLC.

Scenario 2: Multi-Member LLC with Employees

Example: ABC Home Services, LLC is owned by two friends, Alice and Bob (each a 50% member). They started their multi-member LLC to offer home cleaning and maintenance services. Initially, Alice and Bob did all the work themselves. As business picked up, they needed extra hands. They decided to hire employees – a team of 3 cleaners – to fulfill the growing client appointments.

For the multi-member LLC, here’s how the hiring scenario unfolds:

Employer role: The LLC (ABC Home Services, LLC) is the employer for the cleaning staff. Alice and Bob, as owners, are not on the payroll. They split the profits of the business in accordance with their operating agreement (50/50) after paying all expenses, including the employees’ wages. Neither owner takes a W-2 salary; instead, they take distributions of profit.
Payroll setup and taxes: Since they have employees, the LLC already had an EIN from the start (it was needed to open a bank account and because multi-member LLCs require an EIN for filing partnership returns, and definitely for having employees). They set up a payroll system when hiring the first cleaner. Every two weeks, the LLC runs payroll for the 3 cleaners. They withhold appropriate taxes and pay the employer contributions. Each owner’s personal compensation still comes out as a share of profit (not processed through payroll).
Management and compliance: Alice and Bob divide managerial duties. Alice handles scheduling and makes sure timesheets for the cleaners are accurate; Bob handles payroll and tax filings. The LLC carries workers’ compensation insurance to cover the employees, and it abides by overtime rules since sometimes the cleaners work over 40 hours. The LLC also had to register with the state’s unemployment insurance program and file new hire reports to the state for each employee.
Profit vs payroll: It’s worth noting that paying employees is now a cost of doing business for the LLC. Alice and Bob have found that having employees allows them to serve more clients, but it also means the first portion of business income goes to covering payroll and related taxes before the owners see their profit share. This is expected, but it’s a new dynamic for a growing LLC.

Summary of Multi-Member LLC with employees:

Aspect	Details
LLC Type	Multi-Member LLC (multiple owners)
Owners	2 members (Alice and Bob, for example)
Employees Hired	Yes – e.g., 3 employees (cleaning staff)
Owners on Payroll?	No. Owners are not on payroll; they receive profit distributions (not wages).
Tax Classification	Partnership (default for multi-member LLC, pass-through taxation to owners).
Employer Setup	LLC uses its EIN; runs payroll for employees; files partnership return for owners’ profit share.
Key Requirements	Withhold/pay taxes for 3 employees; follow labor laws (overtime, etc.); maintain required insurance (workers’ comp, unemployment).
Considerations	Clear separation of owner compensation (profits) vs employee wages. Owners who work in the business are still not employees without electing corporate taxation.

In this scenario, the multi-member LLC successfully employs a team. Alice and Bob benefit from leveraging employees to grow the business while maintaining their limited liability protection. From the employees’ perspective, ABC Home Services, LLC is their employer – not Alice, not Bob personally. All obligations (payroll, insurance, compliance) fall on the LLC entity.

Scenario 3: Professional LLC (PLLC) Hiring Support Staff

Example: Smile Bright Dental, PLLC is a professional LLC formed by two licensed dentists, Dr. Smith and Dr. Lee, in their state. As a dental practice, they naturally need a support team. They plan to hire dental hygienists, a receptionist, and a billing coordinator as employees of the PLLC.

Professional LLCs must navigate both general employment rules and any profession-specific regulations. Here’s how Smile Bright Dental, PLLC handles hiring:

Licensed owners vs unlicensed staff: As a PLLC, only the dentists are members (owners). Dr. Smith and Dr. Lee are the sole members and each is a licensed dentist. They are not employees of the PLLC; rather, they earn the practice’s profits as owners. The hygienists, receptionist, and billing coordinator are hired as employees of the PLLC. These staff members do not need dental licenses for their roles (only the dentists performing dentistry must be licensed, which they are). Hiring non-dentist support staff is perfectly allowed – the staff will work under the direction of the licensed dentists.
Hiring process and roles: The PLLC obtains an EIN (if not already done when forming the practice). They hire two dental hygienists and agree on their salaries. They also hire a front-desk receptionist and a part-time billing coordinator. All of these hires fill out W-4 forms for tax withholding and I-9 forms to prove they can legally work. The PLLC sets them up on a biweekly payroll. Dr. Smith, acting as the managing member, oversees the staff’s day-to-day work, while Dr. Lee focuses on patients. The hygienists, though they are licensed dental professionals themselves, are employees (not owners) in this practice.
Taxes and compliance: Smile Bright Dental, PLLC withholds taxes from all four employees’ paychecks and pays the employer portions, just like any other employer. They also must be mindful of any additional rules – for example, in healthcare there are rules about who can perform certain tasks. The PLLC ensures that the hygienists only do tasks allowed under dental assistant scope and the receptionist doesn’t perform any dental work, etc. These are standard practice issues rather than legal barriers to having employees. The PLLC carries malpractice insurance for the dentists and general liability insurance for the practice including coverage for employee actions.
Ownership and compensation: At the end of the year, Dr. Smith and Dr. Lee (the PLLC members) will split the remaining profits after all expenses, including staff salaries. They do not receive W-2 forms for their share; instead, the PLLC’s profits pass through to their personal tax returns (likely as a partnership, since there are two members). The employees, however, each get a W-2 from the PLLC reporting their wages.

Summary of Professional LLC hiring staff:

Aspect	Details
LLC Type	Professional LLC (PLLC) – e.g., dental practice owned by licensed dentists.
Owners (Members)	Licensed professionals only (in this example, 2 dentists who own the PLLC).
Employees Hired	Yes – support staff (e.g., 2 dental hygienists, 1 receptionist, 1 billing coordinator).
Owners on Payroll?	No. Owners (the dentists) are not on payroll; they take home profit distributions.
Tax Classification	Partnership (for 2 owners, pass-through). Could also be single-member PLLC or an S-Corp election, but default here is partnership.
Employer Setup	EIN obtained; payroll set up for hygienists and admin staff; compliance with both general employment and healthcare regulations.
Key Requirements	Standard employer obligations (withholding, labor laws, insurance) plus ensure non-licensed staff do not perform licensed professional duties.
Considerations	Only members must hold professional licenses; support staff can be unlicensed for their roles. Professional liability is carried by owners for their work, but that doesn’t limit the PLLC’s ability to hire regular employees for support functions.

In the PLLC scenario, we see that even in regulated fields, LLCs can hire employees to support the business. The key is that those employees operate in allowable roles (admin or support tasks) while the licensed work is done by the owners or other licensed professionals. The PLLC structure still functions like a normal LLC for employment purposes – it is the employer responsible for payroll and compliance, and the owners reap profits rather than wages.

These three scenarios highlight that regardless of the LLC’s makeup – one owner, several owners, or licensed professionals – the LLC can bring on employees to help run and grow the business. The specifics of tax treatment and owner compensation vary slightly (single-member vs multi-member), but in all cases the LLC must take on the standard duties of any employer. Next, we’ll look at evidence and reasoning that further reinforce why LLCs are allowed to have employees, and then compare how this looks relative to other business types.

Proof and Practice: Evidence Supporting LLCs as Employers

It’s one thing to say LLCs can have employees, but let’s back it up with evidence from laws, regulations, and common business practices. Here are several points that demonstrate how LLCs hiring employees is supported in the United States:

Federal recognition of LLCs as employers: The Internal Revenue Service (IRS) and other federal agencies explicitly recognize that an LLC can be an employer. For instance, the IRS requires any LLC with employees to obtain an EIN and pay federal payroll taxes under the LLC’s name. The mere existence of this requirement is proof that LLCs are expected and allowed to hire staff. IRS publications on business structures note that single-member LLCs must treat employees as employed by the LLC (not by the individual owner) – underscoring that the LLC entity is the employer in the eyes of the law.
State laws empower LLCs to hire: State LLC statutes typically grant LLCs broad powers to conduct business activities, usually phrased as “An LLC has the power to carry on any lawful business or activity.” Hiring employees is a fundamental business activity. There is no state law that forbids an LLC from having employees. In fact, many states require new businesses (including LLCs) to register as employers at the state’s labor or employment department if they plan to hire workers, again treating the LLC as a valid employing entity. Additionally, states treat LLC employees the same as employees of any other company for purposes of unemployment insurance and worker’s compensation.
Prevalence in small business statistics: In practice, many small businesses that have employees are LLCs. Statistics from the Small Business Administration show that about 20% of small businesses have at least one employee (the rest are owner-only operations). Given that the LLC is one of the most popular business structures for new small businesses (thanks to its simplicity and liability protection), a significant portion of those employer businesses are organized as LLCs. It’s common to find LLCs in every industry – from restaurants to tech startups – with teams of employees. If LLCs could not have employees, this simply wouldn’t be the case. But reality indicates they can and do: walk into a local boutique or a cafe, and if the business is an LLC, those workers serving you are employees of that LLC.
IRS treatment of owners vs employees (built-in rules): The IRS has clearly defined rules distinguishing LLC members from LLC employees, which implicitly supports that LLCs have employees (just not counting the members by default). For example, the IRS does not allow a partner in a partnership (analogous to a multi-member LLC member) to be treated as a W-2 employee for the partnership’s business. Instead, partners get special tax treatment (self-employment tax on their share of earnings, etc.). This rule exists precisely because without it, one might try to put themselves on payroll. By drawing that line, the IRS acknowledges: the LLC can have employees – but the owners are separate. The presence of this guideline is evidence that LLCs having non-owner employees is normal and anticipated, and also that owners need to handle their compensation differently. Furthermore, the IRS provides the option for an LLC to elect S-Corporation taxation. Many single-member LLC owners take this route specifically so they can treat themselves as an employee of their own company and pay a salary. The fact that this election exists demonstrates that the framework allows an LLC to have employees (even including an owner, if structured as a corporation for tax purposes). In short, federal tax law wouldn’t bother with these distinctions and elections if LLCs having employees were not expected.
Legal and liability precedents: Over the years, courts have consistently treated LLCs as separate legal entities from their owners, including in employment matters. If an LLC with employees is sued by an employee (for example, an employment discrimination claim or an injury at work), the lawsuit is against the LLC, not the individual member, in general. This upholds the principle of limited liability and confirms that the law views the LLC as the employer. The only time an owner might be pulled into an employment lawsuit personally is if the owner did something egregious or failed to maintain the LLC’s separate status (more on that in pitfalls). But under normal circumstances, case law shows judges respecting that “ABC LLC” is the employer responsible for its employees, separate from the owners. This is exactly how it works for corporations as well, and it reinforces that LLCs enjoy the same ability to employ as any company.

All of these points highlight that there is robust support in both law and practice for LLCs having employees. Government agencies have rules in place assuming LLCs will hire workers, data shows many LLCs do have employees, and the legal system upholds the LLC’s role as an employer distinct from its owners.

In essence, if you operate an LLC, you should feel confident that you have the legal green light to hire employees as needed. The key is following the proper procedures and distinctions, which we’ve been discussing and will continue to explore (especially where LLCs differ slightly from other entities in handling employees, next).

LLC vs Other Business Structures: Employee Hiring Differences

How does an LLC having employees compare to other types of business entities? Let’s look at how sole proprietorships, partnerships, and corporations handle employees, and where LLCs are similar or different. This comparison will help highlight any special considerations for LLCs versus these other common structures.

LLC vs Sole Proprietorship

A sole proprietorship is a one-owner business that hasn’t formed a separate legal entity. Legally, the owner is the business.

Ability to hire: A sole proprietor can hire employees just like an LLC can. There’s no separate business entity; the owner hires workers in their own name (often using a trade name or DBA). They must get an EIN to run payroll, withhold taxes, and follow employment laws, same as any employer. On this front, both sole props and single-member LLCs have the ability to hire employees.
Liability differences: The crucial difference is liability. In an LLC, the company is the employer, which shields the owner’s personal assets from most work-related liabilities. In a sole proprietorship, if an employee sues for something job-related (like an injury or wrongful termination), the owner is personally the defendant. All of the owner’s personal assets are on the line because there’s no legal separation. LLC owners generally don’t have that risk — the LLC entity would be liable, and the owner’s personal assets are protected (assuming the LLC is properly maintained).
Owner as employee: Neither a sole proprietor nor a single-member LLC owner is an “employee” of their business. In both cases, the owner simply takes the profits as personal income. You don’t put yourself on payroll in a sole prop (there’s no separate entity to employ you), and likewise by default you don’t put yourself on payroll in a standard LLC. The difference is mostly in formalities and taxes: the sole proprietor reports business income on Schedule C, and the single-member LLC does the same (unless electing corporate tax). But when either hires employees, the process (get EIN, withhold taxes, etc.) is essentially the same. The LLC just does it under its company name, whereas the sole proprietor does it under their own name (or DBA).

In summary, sole proprietorships and single-member LLCs face the same tasks as employers, but LLCs offer the owner protection from business liabilities, whereas sole proprietors are exposed. Many entrepreneurs choose an LLC for that very reason once they start hiring staff.

LLC vs Partnership

A general partnership (without an LLC or LLP structure) is when two or more people co-own a business without forming a corporation or LLC. Much like a sole prop, a partnership isn’t a separate legal entity in many states (though it can sue or be sued in firm name, partners ultimately have personal liability).

Ability to hire: A partnership can hire employees, just as an LLC can. The partnership would get an EIN and run payroll. In fact, a multi-member LLC that’s taxed as a partnership is doing nearly the same thing. So from a functional standpoint, hiring employees in a partnership vs a multi-member LLC is quite similar in process: register for taxes, withhold, etc.
Liability differences: However, a big difference is liability protection. In a general partnership, each partner is personally liable for business debts and claims — including issues arising from employees. If an employee of a partnership causes a liability or sues, the partners’ personal assets could be at risk, because there’s no liability shield. In a multi-member LLC, by contrast, the members generally have limited liability, and an employee’s lawsuit would target the LLC’s assets, not the members personally (again, barring extreme circumstances). This makes an LLC far more attractive if you have co-owners and plan to hire staff, to protect everyone’s personal finances.
Owners as employees: In both partnerships and multi-member LLCs (taxed as partnerships), owners cannot be employees. Partners in a partnership are not on payroll; they take draws and their income is the share of profits (and they pay self-employment tax on it). Likewise, LLC members are not on payroll by default. So in terms of owner compensation, an LLC and a partnership are aligned. If partners want to be on payroll, they’d need to restructure as a corporation or LLC electing S-Corp.

Essentially, a multi-member LLC gives you the operational and tax simplicity of a partnership plus the benefit of limited liability. Both can have employees, but an LLC better protects the owners when employees are involved.

LLC vs Corporation

A corporation (whether C-Corp or S-Corp) is a fully separate legal entity like an LLC, but with a different ownership structure (shareholders) and tax regime. How do corporations compare with LLCs in terms of having employees?

Ability to hire: Corporations, of course, can hire employees. In fact, most large businesses you think of are corporations with many employees. An LLC and a corporation have equal legal ability to hire staff; both must follow the same payroll and labor laws. There’s no practical difference in being able to hire — both entities obtain an EIN, withhold taxes, etc. One minor note: a single-owner corporation still needs to run payroll if that owner is working in the business (as we’ll explain next), whereas a single-owner LLC might not have any payroll if they have no other employees. But in terms of hiring non-owner employees, LLCs and corporations are on the same footing.
Owner as employee (major difference): The treatment of owners is where LLCs and corporations diverge. In a corporation, especially an S-Corporation (commonly used by small businesses), an owner who works in the business is usually also an employee of the corporation. For example, if you incorporate your consulting business as Jane Doe, Inc. and you’re the sole shareholder and also the one doing the work, you are expected to put yourself on the payroll as an employee of the corporation and pay yourself a salary (the IRS requires S-Corp owners to take a “reasonable salary” for the work they do). The corporation will withhold taxes on that salary like any other employer. This means shareholder-employees get W-2s from their own company. In a C-Corporation, while not legally mandated in the same way, typically owners who are active in the business also draw salaries as employees (plus possibly dividends).

In contrast, in an LLC (default taxed as a proprietorship or partnership), owners do not get W-2 pay. They take profit distributions or draws. If an LLC owner wants to be treated like an employee for tax purposes, the LLC can choose to be taxed as an S-Corp or C-Corp. At that point, the line blurs because you have effectively turned your LLC into a corporation for tax purposes. But structurally, as an LLC by itself, members aren’t on mandatory payroll. This difference is key for tax planning: S-Corps can sometimes save owners on self-employment taxes by splitting income into salary vs distribution, whereas LLC owners pay self-employment tax on all profits. It’s one reason some LLC owners “elect S-Corp status.” But purely from an employment standpoint, LLC owners = not employees; corporate owners = can be employees.
Liability: Both LLCs and corporations offer limited liability protection to owners. So from an employee’s perspective or legal perspective, if an employee has a claim, either structure generally shields the owners personally. There’s no big edge one has over the other here; both are good at protecting owners as long as corporate/LLC formalities are respected. (One caveat: in very small single-owner corporations, if the owner fails to treat the corporation as separate, the “corporate veil” can be pierced—same concept for an LLC. So either way, you must properly separate business and personal matters.)
Compliance and complexity: Corporations tend to have more formal requirements (e.g., annual meetings, board of directors, more complex filings). But in terms of hiring employees, both corporations and LLCs must comply with the same laws (tax filings, labor standards, anti-discrimination laws, etc.). One nuance: corporations often have more structured benefit plans for employees (like stock option plans, 401k plans, etc.) especially in larger companies. LLCs can also offer retirement plans or even membership units as incentives, but it’s less standardized. For a small business, these differences are minor — an LLC can provide benefits and comply with laws just as a corporation can.

In summary, LLCs and corporations are very similar in their ability to hire employees and their obligations toward those employees. The primary distinction is how they treat the owners in relation to employment:

In an LLC, owners usually aren’t employees (unless they choose to be taxed as a corp).
In a corporation, owners who work in the business generally are employees and must be paid a salary.

Many LLCs convert to S-Corps as they grow specifically to take advantage of that owner-as-employee structure for tax reasons, but that’s an optional path. Legally, both entities can hire as many employees as they can afford, and must follow identical labor and tax laws for those workers.

Avoiding Pitfalls: Common Mistakes When Your LLC Hires Employees

While LLCs can indeed have employees, there are several common pitfalls and mistakes that new LLC owners should avoid. We’ve touched on a few of these already. Missteps in this area can lead to financial penalties, legal headaches, or loss of the LLC’s liability protections. Here are the big ones to watch out for and avoid:

Misclassifying employees as contractors: This is perhaps the #1 error (remember that statistic in the introduction!). LLC owners sometimes think they can save money or hassle by calling a worker an “independent contractor” when the person is actually working like an employee. If your LLC controls how, when, and where a worker does their job and the worker is essentially part of your regular business operations, they should likely be classified as an employee, not a contractor. Misclassification can lead to IRS penalties for unpaid payroll taxes, and liability for things like overtime or benefits that should have been provided. Avoid this pitfall: Learn the difference (use IRS guidelines) and classify workers properly from the start.
Treating owners as employees (without proper election): By default, if you’re a member of an LLC, you should not put yourself on payroll as a W-2 employee of the LLC. Taking a “salary” from your LLC without electing S-Corp status is improper and can mess up your taxes. Instead, take owner draws or distributions of profit. If you really need to be an employee (for example, to pay yourself a steady salary and withhold taxes), consult a tax professional about electing to have your LLC taxed as an S-Corporation. Don’t just start paying yourself like you would an employee; doing so can cause incorrect tax filings and potentially invalidate the simplicity of your LLC’s pass-through taxation. Avoid this pitfall: Keep clear the distinction between owner withdrawals and employee wages. Only run payroll for non-owner employees (unless you’ve officially changed your tax structure).
Failing to get an EIN and register for payroll taxes: An LLC hiring its first employee must transition from a simple business to one with federal and state accounts for taxes. Some owners forget this step. If you pay someone without an EIN or without setting up payroll tax accounts, you’re essentially paying “under the table” – a big no-no. Avoid this: As soon as you decide to hire, apply for an EIN (it’s free through the IRS). Then register with your state’s labor or revenue department for withholding tax and unemployment insurance accounts. This ensures you can remit the taxes you’ll owe and stay compliant.
Not withholding or paying payroll taxes correctly: Running payroll isn’t just writing a check. It involves calculating taxes to withhold and then depositing those taxes with the IRS/state. New employers sometimes underestimate the complexity or deadlines. If an LLC fails to withhold taxes from an employee’s pay, the IRS will come after the company (and possibly the owners) for those funds. Similarly, not paying the employer’s share (Social Security/Medicare, FUTA, SUTA) is a legal violation. Avoid this: Use a reliable payroll service or software, or an accountant, to handle payroll if you’re not confident. Mark all tax deposit deadlines on your calendar. Don’t dip into withheld taxes for cash flow – that money belongs to the government and must be paid on time.
Ignoring labor laws and regulations: Just because your business is small doesn’t mean you’re exempt from labor laws. LLCs must follow minimum wage laws, overtime rules (under the Fair Labor Standards Act), anti-discrimination laws (EEO laws), family and medical leave (if applicable), workplace safety regulations (OSHA), and so on. Sometimes small business owners inadvertently violate overtime rules or fail to provide required meal breaks (state-dependent) because they’re not aware of them. Avoid this: Educate yourself on the basic labor laws that apply to your size of business. Many laws have thresholds (for example, some federal discrimination laws kick in at 15 employees), but state laws can apply even to 1 employee. Treat your employees fairly and document their hours, wages, and any agreements. Consider consulting an HR expert or legal counsel as your team grows.
Skipping required insurance (workers’ comp/unemployment): Most states require that businesses carry workers’ compensation insurance once they have employees (in some states, if you have even one employee, you need it; in others, the threshold might be 2-5 employees or specific to industry). This insurance covers medical bills and lost wages if an employee is injured on the job. Similarly, employers must pay into unemployment insurance (through state and federal programs) so that employees who lose their job can receive benefits. If you don’t pay these or get coverage, you could face fines and be directly responsible for costs. Avoid this: Upon hiring, check your state’s requirements and obtain a workers’ comp policy if mandated (even if not mandated, it’s wise to have). Make sure you’re registered for unemployment tax and paying it via your quarterly payroll reports.
Commingling funds or breaking the corporate veil: One of the advantages of an LLC is liability protection. But that can be jeopardized if you don’t keep the LLC’s affairs separate from your personal affairs. When it comes to employees, a mistake would be paying employees out of a personal bank account or signing an employment contract in your personal name instead of the LLC’s name. Doing so can blur the lines between you and the company. If an employee later sues and can show the LLC was just an “alter ego” of you (the owner), they might try to pierce the LLC veil and reach your personal assets. Avoid this: Always pay employees from the LLC’s business bank account, funded by business funds. Sign all employment documents as an authorized representative of the LLC (e.g., “Jane Doe, Owner of Jane’s Coding Consulting, LLC”), not just as “Jane Doe” individually. Keep good records of all payroll transactions in the company books. Essentially, treat the LLC like the separate employer entity that it is.
Poor documentation or no written policies: While not a legal requirement for very small teams, having no documentation can lead to misunderstandings. It’s a mistake to hire employees without at least providing basic offer letters, job descriptions, or obtaining the necessary paperwork. Also, not documenting performance or behavior issues can make it hard to defend your LLC if you need to fire someone and they claim it was unlawful. Avoid this: Even as a small LLC, use offer letters or employment agreements that clarify the role and pay. Have new hires sign required forms (W-4, I-9, any state-specific forms). Keep an employee file for each person. If issues arise, keep notes. If you have a handful of employees, you might even draft a simple employee handbook so everyone knows the rules. Professionalism with documentation can prevent many problems down the road.

By steering clear of these pitfalls, you set your LLC and your employees up for success. When in doubt, seek advice from professionals (HR consultants, employment attorneys, tax advisors). Hiring employees is a big step, but with the right practices, your LLC can grow its workforce without growing its risk. Remember, the goal is to not join that “40% misclassification” statistic or any other negative metric — instead, be part of the majority of responsible LLC owners who get it right.

By understanding these common mistakes and how to avoid them, you’ll protect your business and ensure a smooth experience as an employer under your LLC. Now, to wrap up, let’s answer some frequently asked questions that often come up on forums like Reddit or Quora regarding LLCs and employees.

FAQ: LLCs and Employees

Q: Can a single-member LLC have employees?
A: Yes. A single-member LLC can hire employees like any other business. The LLC must obtain an EIN, run payroll, and handle taxes for those employees just as larger companies do.

Q: Is the owner of an LLC considered an employee of the LLC?
A: No. An LLC’s owner (member) is not an employee by default. The owner takes profits as distributions or draws, rather than a paycheck, unless the LLC elects to be taxed as a corporation.

Q: Can an LLC hire independent contractors instead of employees?
A: Yes. An LLC can hire independent contractors (who receive 1099 forms). However, contractors are not employees, so be sure to classify workers correctly to avoid misclassification penalties.

Q: Do LLCs need an EIN to hire employees?
A: Yes. Any business with employees must have an Employer Identification Number. An LLC must obtain an EIN from the IRS and use it to report and pay payroll taxes for its workers.

Q: Can a professional LLC (PLLC) hire staff who aren’t licensed in the profession?
A: Yes. A PLLC can employ non-licensed support staff (e.g., assistants, office staff). Typically only the owners must be licensed professionals; support employees can handle administrative or non-licensed tasks.

Q: Are LLC owners required to pay themselves a salary?
A: No. LLC owners generally do not take a salary. They receive profit distributions from the business. Only if the LLC elects S-Corp taxation would an owner then pay themselves a salary as an employee of the company.