Should a two member LLC, with 50/50 ownership, where one member is a separate LLC file a schedule M-3?

Yes, your two-member LLC is required to file Schedule M3 as it is 50% owned by another LLC.

Please read this IRS document for more information. 

Is there added personal protection by doing this or is it overly complicating things?

The M-3 doesn't provide additional protection, but it does reconcile financial statements and:  

• Gives the IRS additional information about tax return calculations and the differences between book income numbers and taxable income numbers
• Contains 3 main sections: (the detail requested must be present for book and financial statements and tax)
  • Financial statement reconciliation (Part I)
  • Detail of income/loss items and (Part II)
  • Detail of expenses/deductions (Part III)
• The M-3 requires companies to expose the types of adjustments they are making to book numbers to derive at taxable income. 

Ok thank you, this helps a lot.  I am wondering for how we manage the partnership going forward.  Is there any benefits like additional separation from partners, personal liability protection, or anything else by transferring my 50 percent ownership of the two memeber LLC to my single member LLC?  Is there any benefits from passing the partnership K-1 income through my LLC and then to my personal, compared to the K-1 partnership income and my LLC income separately to my personal?  Or even a different option, having the partnership being owned by two LLCs 50/50 instead of two individuals. I realize the taxable amounts stay the same.

There is no tax advantage to having two LLC's as the partners of the other LLC.  

As to if you would have additional liability protection you would need to consult a lawyer.