Starting a business involves making many important decisions. One of the first is choosing the right legal structure. A limited liability company (LLC) offers liability protection and tax flexibility, making it a popular choice for small businesses. But there are different types of LLCs available.
Understanding the variants can help you pick the best LLC structure for your needs.
LLCs allow entrepreneurs to customize the legal structure to their business needs. The main types of LLCs differ in number of owners (single vs multi-member), management (member vs manager), and location (domestic vs foreign). Business owners should weigh options like ownership, control, taxes, and liability protection when choosing which LLC structure best fits their company.
An LLC combines aspects of partnerships, sole proprietorships and corporations. Like a corporation, an LLC shields your personal assets from business debts and liabilities. And like a partnership or sole proprietorship, profits pass through to your personal tax return.
LLCs also provide flexibility in management and ownership. You can run an LLC yourself or appoint managers. And you can have single or multiple members. The options available make LLCs customizable to your business model and goals.
So what are the main types of LLC entities?
1. Single-Member vs Multi-Member LLC
As we all know, there are many Types of LLCs. The first key distinction is between single-member and multi-member LLCs.
Single-Member LLC
As the name suggests, this type of LLC has only one owner or member. Single-member LLCs offer liability protection for sole business owners. Your personal assets remain protected from business obligations.
For tax purposes, single-member LLCs are treated as sole proprietorships by default. Profits and losses pass through to your personal tax return. You’ll use Schedule C to report business income on your Form 1040.
Key Benefits:
- Liability protection for sole owners
- Simple taxes like a sole proprietorship
- Easy to form and operate
- Inexpensive startup costs
Multi-Member LLC
This type of LLC has two or more owners or members. Partnerships and small groups commonly use multi-member LLCs.
For taxes, multi-member LLCs default to being taxed as partnerships. Profits pass through to owners’ personal tax returns. The business itself doesn’t pay taxes. Each member reports income on Schedule K-1 with a Form 1065 partnership return.
Key Benefits:
- Liability protection for multiple owners
- Pass-through partnership taxation
- Shared ownership and flexible management
2. Manager-Managed vs Member-Managed LLC
LLCs can also be structured as manager-managed or member-managed. This impacts control and decision-making.
Member-Managed LLC
In a member-managed LLC, all members have equal rights in managing the business. Decisions are made collectively through votes, often based on ownership percentages.
Member-managed structures work well for small, closely held companies. They provide democratic control for all owners. However, decision-making can become difficult in larger LLCs.
Manager-Managed LLC
Manager-managed LLCs appoint one or more members to manage daily operations. This structure separates ownership and control.
Manager-managed LLCs operate like corporations, with members acting as shareholders. Daily business decisions are handled by appointed managers. This makes decision-making simpler and more efficient.
3. Domestic vs Foreign LLC
Where an LLC is formed and operates also impacts the available structure options. The terms domestic and foreign LLC refer to where the LLC is created compared to where it conducts business activities.
A domestic LLC is formed and runs its operations in the same state. For example, an LLC started and doing business exclusively within the state of Texas would be defined as a domestic LLC under Texas law. Domestic LLCs must register in the state where they are headquartered and comply with all legal and regulatory requirements in that particular state.
On the other hand, a foreign LLC is established in one state but engages in business activities within a different state. If an LLC is created in Delaware but runs operations from offices in New York, it would be treated as a foreign LLC under New York state law. Even though its place of formal creation is Delaware, its on-the-ground activities in New York make it an outsider or foreign entity in NY.
Foreign LLCs conducting regional or national business must register with each state where they will maintain personnel or facilities. They must meet filing and reporting rules for foreign entities operating in those states. Proper registration procedures must be followed to legitimately run portions of the business as a foreign LLC when expanding into additional states.
So, where you form and operate your LLC also affects the following structures:
Domestic LLC
When you form an LLC in the state where your business is located and operates, it’s considered a domestic LLC. Domestic LLCs must comply with the formation and operating rules in their home state.
Foreign LLC
If you form an LLC in one state, but do business in another, you have a foreign LLC. For example, an LLC formed in Delaware that operates in California is a foreign LLC in CA.
Foreign LLCs must register with the state where they plan to do business. They’ll need to file articles of organization and adhere to rules in that state.
4. Other Types of LLCs
In addition to the main classifications covered so far, some states allow the formation of specialized LLC entities that offer particular benefits. These less common variations of the LLC structure are worth understanding, as they provide further options to potentially help your business.
If available in your state, you may want to consider using one of these specific LLC formations that cater to certain business models and goals. Here are some of the more unique LLC entities that have emerged over the years:
The Series LLC permits dividing the LLC into separate series or cells. Each series acts independently, with its own designated assets and liabilities contained within that series. This segmentation of assets can provide extra protection by isolating liabilities into different series. The ability to silo assets and contain risks within each series unit makes the Series LLC configuration appealing for some businesses. However, only a handful of states currently allow the formation of Series LLCs.
The Professional LLC (PLLC)offers personal liability protection while allowing licensed professionals to legally deliver regulated services through the LLC. Doctors, lawyers, accountants, architects and other licensed experts can benefit from forming a PLLC. This structure meets the legal requirements to provide their professional services in an LLC rather than needing to use a corporation.
In short, some states allow special LLC structures that offer added benefits:
- Series LLC – Lets you segregate assets and operations into separate series or cells. Liabilities are contained within each series. Only a few states allow this.
- Professional LLC (PLLC) – Used for licensed professionals like doctors, lawyers and CPAs. Provides liability protection plus allows practicing under a license.
- Nonprofit LLC – For businesses focused on religious, charitable, educational, scientific or literary ventures. Offers liability protection with a nonprofit mission.
- Low-Profit LLC (L3C) – Pursues socially beneficial goals while earning some income. This structure places social mission above profits.
Choosing the Right Type of LLC
To pick the ideal LLC structure, consider:
- Your business model and operational needs
- State laws and requirements where you’ll operate
- Your goals for ownership, control and management
- Tax implications – talk to an accountant
- Legal protections specific to your industry
An experienced small business attorney can guide you in choosing and forming the right type of LLC for your company. They can ensure your LLC meets all state legal and filing requirements too.
The flexibility of LLCs empowers you to tailor the structure to your unique business needs and goals. Understanding the different types helps you leverage an LLC to benefit your venture and protect your personal assets. With the right foundation, you can build a company poised for growth and success.
Ready to Form Your Best-Fit LLC?
There are many benefits to starting your business as an LLC. But choosing the wrong structure can lead to issues down the road. We offer comprehensive LLC formation services to help your company start strong.
Our small business attorneys can advise you on the optimal LLC type for your goals and operations. We’ll also handle all the necessary filings and documentation. This ensures your LLC meets legal requirements in your state. Contact us today to form an LLC tailored to your business needs.
Conclusion
When starting a business, one of the most important early decisions is choosing the right legal entity. LLCs provide an attractive option for many small businesses because they offer liability protection plus operating and tax flexibility. Understanding the different classifications of LLCs empowers entrepreneurs to select the structure tailored to their unique business needs and goals.
Key factors to consider include number of owners, management preferences, taxation implications, and state requirements. With the flexibility LLCs provide, business owners can craft a customized structure to help support their venture as it grows.
Taking the time to choose the optimal LLC formation for your company helps set up a solid foundation poised for success. With the proper setup, you’ll have the right legal protections and advantages in place from day one to help your business thrive.
Frequently Asked Questions (FAQs)
What is the most common type of LLC?
The most common LLC structure is a single-member, member-managed LLC. This simple structure provides liability protection for sole business owners who want to manage their own companies.
What are the 2 main types of LLCs?
The two primary classifications of LLCs are single-member vs multi-member and manager-managed vs member managed. These categories allow customizing ownership, control and taxation.
What are the 4 types of LLCs?
The four main types of LLCs are based on number of members (single vs multi) and management structure (member-managed vs manager-managed). Some states also allow special LLC structures like Series, Professional, Nonprofit and Low-Profit LLCs.
Should I choose an LLC or corporation?
LLCs provide more flexibility for small businesses. Unlike corporations, ownership is not limited to stock shares, and different classes of membership are allowed. LLCs also avoid double taxation and burdensome record-keeping.
What’s the difference between an LLC and a partnership?
LLCs provide liability protection that general partnerships lack. LLCs also allow more flexible management options. With partnerships, all members participate equally in running the business.
Aisha Noreen is an owner of a small business with more than 9 years of experience in the marketing industry. With the wisdom of an old soul, she always seeks innovation and mind-blowing ROI techniques. Her unique approach helped many small businesses thrive and she can surprise you in many ways as well. Believe it or not, her energy, passion, and creativity are contagious enough to transform your business and take it to another level.
